Investors in Great Britain are seeing a boom in the prices of gold sovereign coins with premiums of 11 per cent being paid by buyers. Just one year previously the premiums for the same coins were as low as 2-3 per cent over the coin’s melt value. There are many reasons why the market is booming, but what can international gold investors learn from what is happening in Great Britain?
The gold spot price is a benchmark for what gold bullion dealers will buy and sell their coins and bars at, however, market conditions can cause the actual price of the bullion to trade at a high premium to the spot price. This is what is currently being seen in London as a leading gold bullion companies such as Auronum are increasing their buyback rates for all gold coins.
The high premiums are more obvious in the gold sovereign market. These are British gold coins but are traded all over the world. The coin weighs just under 8g of 22-carat gold, making them affordable to more investors than large and more expensive gold bars.
There are several reasons why physical premiums are rising for gold coins which will be discussed below.
Increased demand for physical gold
The high consumer price inflation seen across the world in 2022 caused uncertainty and many people with funds responded to this uncertainty by buying physical gold. Gold coins are seen as a haven and hold their value during times of economic crisis and distress. The increase in demand caused buyers to compete with one another which pushed the physical premium of the gold bars and coins higher.
Fractional gold coins outperform
Physical premiums for larger bars and coins have not changed despite the rise in demand for physical gold. The high premiums are being paid in the market for smaller coins, this tells us that whilst gold demand is increasing, that demand is very focused on the small coin side of the market. The masses can afford to regularly buy gold sovereigns priced at £385 per coin, whereas the same individuals may struggle to buy larger ounce gold coins at £1575 per unit.
Currency collapses lead investors to park funds in gold
Many currencies have collapsed in value in recent years which has highlighted the vulnerability of households storing their wealth in cash. The Turkish Lira collapsed 44 per cent in 2021 after the central bank opted for lower interest rates despite rising inflation, causing a large loss in purchasing power for the Turkish people.
The Egyptian pound suffered its third devaluation in less than a year in January 2023 as the Egyptian pound tumbled to a record low of 32 pounds to a US dollar. The recent exchange rate slide of 13 per cent against the US dollar will only intensify the surging inflation problem in Egypt with investors storing their wealth in Egyptian pounds likely to feel the pain more than others.
The Egyptian public has suffered continuous high inflation in recent times as a result of a declining pound which was devalued in March and October 2022, leading to a fall of 40 per cent against the US dollar over the period. This shows other nations the risks of holding cash reserves.
Gold prices rising inspires confidence
Investors are willing to pay higher prices for assets when they are confident about that asset’s future. There is nothing more important in encouraging confidence than a rising price. The rise in the gold spot price has reinforced the positive sentiment that gold investors have for gold sovereigns and other coins which causes them to feel more at ease in paying higher premiums.
Rising prices rarely increase selling because if most market participants believe prices are going to continue higher, then sellers will want to wait for higher prices. The lack of sellers causes intense competition between buyers who are competing for limited stock in the market.
The British gold sovereign coin market shows that investor demand for coins is currently very strong, with the lower-valued gold coins being where most of the demand is being focused. This means that international investors may profit from buying larger bullion bars and coins which are seeing less demand.
A fall in gold price may lead to more sellers coming to the market who were previously inactive because they believed the gold price would keep rising. International gold investors may fair better by investing in larger bullion bars and coins after the gold spot price has dropped. This is because there is currently already less competition between buyers for larger gold products.
A fall in the gold spot price may encourage more sellers to come to market as the fall in gold price causes them to lose some of their confidence in the gold market. A fall in the gold spot prices will likely lead some sellers who were expecting gold prices to keep rising to panic and try to lock in what is left of their profit on their gold coins.
Likely, investors that are looking to buy small gold coins in a rising gold market will need to pay a significant premium to outcompete other buyers which may leave them in unprofitable positions if the gold price falls.
Therefore international gold investors should be cautious about buying small gold coins such as British gold sovereigns in a rising market because the premiums are likely to be high which may lead to losses if confidence in the market drops due to a fall in international gold spot prices.
Namrata Thakkar is a CMO at Kingdom Corp.
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