Money has been around some 2500 years—when the first coins were minted—but its function has remained largely the same. Money is any clearly identifiable object of value that is generally accepted as payment for goods and services or repayment of debts. That applies to particular markets as well as a country where certain forms of money are considered legal tender.
Since ancient times, many things have been exchanged in markets. This includes livestock and sacks of cereal grain (from which the currency known as the Shekel is derived) – items that are useful, but also occasionally attractive, such as cowry shells or beads. Precious metals—from which early coins were made–fall into this second category.
The History of Gold and Silver
Gold and silver have been around as long as money has exchanged hands. These two precious metals have been used as tradable money for thousands of years—a lineage that no printed money can even come close to matching. That’s one reason why many people value gold and silver as much as they do.
Additionally, gold has always been known as a symbol of luxury and affluence. Silver, on the other hand, was often used in more practical applications. Where gold was often worn as jewelry, silver was frequently used as silverware or other accessories.
Jewelry, Currency and Other Common Applications
Gold and silver have had many different uses over the past thousands of years. Today, they’re most commonly seen in jewelry and currency. But, no matter the timeframe, gold and silver have always been symbols of money and power. Not only are they attractive, they are rare and sufficiently malleable to be formed into many different shapes and sizes. They represent a tangible value defined by weight and purity. Moreover, they can’t be artificially reproduced. (Unlike paper money, no machine can simply “make” new gold and silver.) The amount of precious metals in the world today remains a static figure, varying based on the amount that is readily available.
These and other attributes make precious metals desirable for people throughout the world.
Aside from jewelry and currency, silver and gold are also used as investments and in a variety of industrial applications. While the value of metals harkens back to its use as currency, industrial use can be attributed to its soft, conductive qualities. That makes silver and gold useful in the production of everything from electronics to vehicles.
The Gold Standard
While the term “Gold Standard” is a familiar term to many referring to something that’s top of the line, it also has a more literal meaning. Gold standard means that a government bases its currency on the value of precious metals, namely gold and silver.
From 1785 until 1861, the United States based its financial structure on gold and silver. Instead of the paper money used today, coins made of pure gold and silver were traded in the free market.
That didn’t last. In 1933, President Franklin D. Roosevelt enacted Executive Order 6102, which forbade private ownership of monetary gold. All gold was to be turned into the government, with former owners receiving $20.67 per ounce in return. As a result, gold shot up in value to $35 per ounce shortly thereafter.
The Gold Reserve Act of 1934 marked the absolute end of the Gold Standard in the U.S. While the country had already moved from using gold and silver alone, up to this point it was still possible to trade currency for gold.
The Post-war International Gold-Dollar Standard
After World War Two, a system similar to a Gold Standard–sometimes described as a “gold exchange standard”–was established by the Bretton Woods Agreements. Officially known as the United Nations Monetary and Financial Conference, The Bretton Woods Conference was a gathering of delegates from 44 nations in the summer of 1944 in Bretton Woods, New Hampshire to devise a series of new rules for the post-war international monetary system. Under this plan, many countries fixed their exchange rates relative to the U.S. dollar. Central banks could exchange their dollar holdings for gold at the official exchange rate, which was $35 per ounce (this option was not available to firms or individuals.) All other currencies pegged to the dollar also had a fixed value in terms of gold. The system was easy to understand and use.
Starting under the administration of French President Charles de Gaulle and continuing until 1970, France trimmed back its dollar reserves, exchanging them for gold to minimize American economic influence. This, along with the financial strain of the Vietnam War and persistent balance of payment deficits, led President Richard Nixon to end the dollar’s direct international convertibility to gold in August 1971.
Nixon’s decision was designed to be a temporary measure. Revaluing currencies was the main purpose of the plan. But no official revaluation or redemption occurred. The dollar subsequently floated, meaning it had no official rate of exchange between it and any other currency.
The “Smithsonian Agreement” was reached in 1972. Under this plan, the dollar was devalued from $35 per troy ounce of gold to $38. In contrast, other countries’ currencies were increased in value. Policies to maintain the dollar’s value relative to other currencies were also put into place. However, there was still no international convertibility into gold.
Within a year, the new exchange rate became unrealistic. For one thing, it would have required the United States to redeem more dollars than it had in gold and foreign currency reserves. Another option was to contract the economy to increase the purchasing power of the dollar. As a result, in October 1973, the dollar was devalued to $42.22 per troy ounce of gold. Once again, the devaluation was insufficient to hold the price of gold at that low a price; within two weeks, the dollar was floating again. Ironically enough, the $42.22 par value was made official in September 1973, long after it had been abandoned in practice. In October 1976, the government officially removed any references to gold from the official definition of the dollar.
Gold and Silver Today
The use of gold and silver today is much more diverse than many people realize. Jewelry is popular for precious metals, but it is hardly the only market that generates consumer and industrial demand. Everyone from investors to automobile manufacturers has an interest in precious metals. Prices would be greatly affected without that diverse and varied source of demand.
As noted earlier, jewelry and investments are the two most common uses for gold and silver. It’s important to note that the term “investment” does not specify an individual holding gold and silver. Everyone from everyday citizens to entire countries invests in precious metals. This is one of the characteristics that makes it so unique. You aren’t going to find many global powers buying up shares of a public company, but many are making certain they own their fair share of gold and silver.
Who Sets the Prices?
What are the London gold and silver fixings? Who exactly are the fixers? Who sets the prices of gold, silver, platinum and palladium?
And, if the gold bullion market is centered in London, how can it trade non-stop, 24 hours a day?
Supply and Demand
Precious metals trade freely both on and off exchanges. Market prices are determined by supply and demand as reflected in bids and offers and thousands of daily transactions. The London gold and silver bullion markets and Comex exchange futures market in New York are the most liquid precious metals trading forums. They are kept closely in line with each other through dealer arbitrage (a price difference established between two or more markets). Prices of all other forms of gold and silver are based on the prices in these markets. The new Pan Asia exchange in China may someday join these markets in setting the price of gold.
The London Fixings
The so-called London fixings in gold, silver, platinum and palladium may sound like conspiracies, but they’re actually auction markets. The fixings use a series of successive, twice daily trials to identify the single price for “spot” at which all orders of buyers and sellers–primarily bullion dealers and their largest customers–are matched and balanced. These fixing prices are used as guideposts for pricing metals contracts between dealers, mining companies, refineries and others throughout the world.
Gold is fixed at 10:30 a.m. and 3 p.m. local time by the five members of the London Gold Market Fixing, who act as brokers for their customers. Silver is fixed daily at noon by the three members of the London Silver Market Fixing.
Platinum and palladium are fixed daily at 9:45 a.m. and 2 p.m. by the four fixing members of the London Platinum & Palladium Market.
Bullion traditionally refers to gold and silver bars as well as other precious metals bars or ingots. The word bullion reportedly originates from Claude de Bullion, who was a French aristocrat and politician who served as a Minister of Finance under Louis XIII from 1632 to 1640. An alternate theory suggests that the term comes from the old French word bouillon, which means “boiling” –the term for a mint or melting house.
Bars, Rounds and Coins
Just as there are basic differences between gold and silver, there are also distinctions between physical forms of gold and silver. This includes bars, rounds and coins.
Gold and Silver Bars
Gold and silver bars are thin, rectangle-shaped pieces of metal that are produced by private minting companies worldwide. These mints charge a small premium over the “spot” price for fabricating raw gold and silver into neat, stackable bars.
A mint that produces a gold or silver bar will stamp its company name or logo onto the bar, along with weight and purity. This information helps investors determine exactly what amount of metal is contained in the bar.
Most mints produce gold and silver bars with fairly similar dimensions, but each mint’s sizing will be slightly different. That means only bars produced by the same mint are stackable.
Gold and silver bars (along with rounds) carry the lowest premium over spot. That makes them favorites among investors who are primarily interested in accumulating as much metal as cost effectively as possible.
Common weights for silver bars are always measured in English. They range from 1 ounce up to 100 ounces. Buyers can find lesser and greater bar weights than this (including Metric weights), but almost all silver bars available to individual investors will be measured in English and fall between 1 and 100 ounces.
Advantages of Bars:
- Easily stored and transported, as bars produced by the same mint are stackable.
- Carry the lowest premium over spot price for both gold and silver.
Disadvantages of Bars:
- Generic bars produced by normal mints do not offer any sort of “collectability” factor.
- The largest bars (10 ounce gold bars or 100 ounce silver bars) may be harder to trade than smaller bars in the event of some sort of crisis. (WHY?)
Gold and Silver Rounds
Gold and silver rounds are thin, circular discs of metal produced by minting companies all over the world.
Although many investors think coins and rounds are essentially the same, there is one primary difference. Coins are considered legal tender and are produced by government mints, while rounds cannot be used as currency and may be produced by either government or private mints.
Similar to the production of a bar, a mint that produces a gold or silver round will stamp its company name or logo onto the round, along with the weight and purity. That helps investors determine exactly how much metal the round has. Most mints produce gold and silver rounds with fairly similar dimensions, but each mint’s sizing will be slightly different. As a result, buyers usually only stack rounds that have been produced by the same mint.
Like bars, rounds carry a very low premium over spot price per ounce. This is due to their generic status as well as their wide availability.
Common weights for gold rounds range from 1/10 of an ounce to 1 ounce. Common weights for silver rounds range from one-half of an ounce to 5 ounces.
Advantages of Rounds:
- Easily stored and transported, as rounds produced by the same mint can be stacked.
- Carry the lowest premium over spot per ounce for both gold and silver.
Disadvantages of Rounds:
- Generic rounds produced by normal mints do not offer any sort of “collectability” factor.
Gold and Silver Coins
Gold and silver coins appear similar to rounds, but are different in that they have status as legal tender and are produced by government-run mints.
Coins often have different designs from one year to the next, making certain years particularly appealing for collectors. These carry significant premiums over the spot price of the metal contained in the coin.
Coin designs include the obverse design, which is the front side of the coin, and the reverse design, which is the back side.
Most coins have their face value, year, and an intricate design stamped onto their obverse side, with their purity, weight, and a different design stamped onto their reverse. Their are plenty of exceptions to these norms, but almost all coins will, at the very least, include face value, year, weight and purity somewhere on the coin.
Coins are available in different dimensions, so investors usually can only stack coins of the same variation. Some coins are also minted in multiple dimensions and weights, such as the American Gold Eagle, which is regularly minted in 1/10 of an ounce, 1/4 of an ounce, 1/2 of an ounce and 1 ounce sizes.
Coins usually sell slightly above the spot price of the metal contained inside them. Additionally, they almost always carry a higher premium than bars or rounds due to their collectability, relative rarity and status as legal tender.
Common weights for gold and silver coins range from 1/10 of an ounce to 1ounce. There are larger coins such as the Chinese Silver Panda, which is occasionally produced in 5 ounce, 12 ounce and 1kilogram weights.
Many newcomers to gold and silver investing wonder how a bullion and a numismatic coin are different.
First, let’s address the fundamentals.
Bullion coins are gold and silver coins purchased for one of three reasons: investment, inflation hedge or preservation of capital. Often, all three reasons factor into the decision to invest in bullion coins.
A bullion coin’s weight is expressed as an even amount, such as 1-ounce, 1/2-ounce or even grams (for gold and silver bars).
With only a few exceptions, bullion coins are manufactured year-to-year and are purchased primarily as an investment. (NOTE FROM JEFF: THIS CONTRADICTS THE “THREE REASONS” STATEMENT ABOVE.)
Examples of bullion coins include:
- U.S. Gold Eagles
- Canadian Gold Maples
- U.S. Silver Eagles
- Canadian Silver Maples
- South African Krugerrands
- 90 percent Junk Silver (such as pre-1965 half-dollars, quarters and dimes.)
(Although 90 percent of junk silver quarters are no longer produced, their value is based exclusively on the coin’s silver content and not its condition.)
By contrast, numismatic coins are considered collectible and are not produced in modern times. Rarity, rather than their content, account for most of their value.
While numismatic coins are exciting from a historical or collecting perspective (much like a Model-T Ford), they don’t provide the long-term financial security of other coins.
Bullion or Numismatic?
- Should you need to sell it, bullion’s .999 percent pure metal content makes it simple to value the coin accurately.
- Buy numismatics for fun, as a hobby or for educational purposes.
- Remember the maxim: Numismatics to Show, Bullion to Grow.
Precious metals such as gold, silver, platinum and palladium have served numerous purposes over the course of time.
Historically, precious metals like gold and silver bullion have not suffered the boom and bust cycles prevalent in many other forms of investments. If you own a home or invest in the stock market, you know what that can feel like.
That makes stability the first reason to consider precious metals.
With the U.S. economy still vulnerable after the worst recession in a generation, gold and silver bullion and coins offer a refuge from the volatility of equity markets and other asset classes. In this environment, precious metals offer a means of protecting wealth with comparative safety.
The U.S. dollar is a fiat currency with nothing behind it to ensure its value. The only factor that lends value is people’s willingness to continue to use it as a medium of exchange. But since the U.S. dollar is essentially worthless paper or digits on a computer, the central bank can create as many dollars it see fit. That devalues every other dollar in circulation. Over the last 100 years, studies show that the U.S. dollar has lost 97 percent of its purchasing power.
Inflation is one of the greatest dangers to wealth preservation. For centuries, inflation has been the inevitable consequence of governments creating large amounts of money with a lust for more capital. Over the past several years, vast quantities of money have been printed to stimulate the economy and finance both the deficit and the government. With rates (WHAT RATES?) nearly at zero, the only weapon the Federal Reserve had to use against the economic downturn and avoid deflation was to produce more money. The bottom line is less purchasing power. That’s the insidious side of inflation; it acts like a hidden tax that destroys the value of every dollar. (SEE CHARTS BELOW)
U.S. Money Supply
As the money supply increases, the U.S. dollar value loses.
US Dollar 2000-2012
Precious metals are one of the few asset classes that offer a refuge from devaluation of the U.S. dollar. Gold is considered to be a long-term hedge against inflation. That has been empirically illustrated by research conducted by the World Gold Council. Perhaps one of the most well-known relationships in currency markets is the inverse relationship between the U.S. dollar and the value of gold. As the dollar’s value decreases, it takes more dollars to buy the same amount of gold. When one goes up, generally the other goes down. (SEE CHARTS BELOW)
Inverse relationship of the US Dollar and Gold 2000-2012
While the dollar’s value is at risk of fluctuation through shifts in monetary policy, gold’s value is largely determined by supply and demand. There’s no interference from changes in either monetary or corporate policies. In 2009, after nearly two decades of selling gold, central banks became buyers of gold. In 2012, central banks acquired more gold than they had annually in nearly half a century. With debt projections that boggle the mind, this trend will likely continue in the future. As an example, countries like China and Japan that hold a huge amount of U.S. debt buy gold to hedge against losses in U.S. currency due to inflation.
Interested in learning more? Contact International Hard Assets to learn how you can take steps to preserve your wealth with one of the most stable asset classes in all of human history. Gold and silver bullion are essential components of a diversified, well rounded portfolio.
Below are definitions of some of the most commonly used terms in the precious metal investing world.
A test to determine the quality and purity of a gold or silver product. When a gold or silver product ships with an “assay”, this is a guarantee from the assayer that the product in question does indeed contain the described amount and purity of gold or silver.
A coin that has never been in circulation, and is in shiny, new, and immaculate condition.
Coins that have been distributed to the public as currency. Usually in much worse condition than uncirculated coins.
Post-1965 U.S. coins with a pure copper center and layers of other metals, usually copper-nickel or silver. Dimes, quarters, halves, and dollars are the only denominations with these possible attributes. 40% Kennedy half dollars are the most well known of this consistency. Each coin contains .1479 troy ounces of silver and .2214 troy ounces of copper.
A physical product which is commonly traded and holds value based on the product’s industrial and commercial value.
The condition of a gold or silver bar, round, or coin. Common conditions are “New”, “Varied”, “Brilliant Uncirculated”, “Proof”, “Circulated”, etc.
How easy it is to piece out and distribute a fixed weight of a certain product. Ex: Ten 1 Ounce Silver Bars are more divisible than One 10 Ounce Silver Bar.
Prior to 1933, the Double Eagle gold coin was standard currency in the United States with a face value of $20. The two types of Double Eagles are the Liberty Head and the Saint Gaudens, which were minted from 1849-1907 and 1907-1933 respectively
A metal consisting of a natural mixture of gold and silver.
The part of a coin with no design or lettering, often referred to as the background.
The purity of the precious metals used to mint a coin (i.e. 90% or .900 fine, 99.9% or .999 fine)
Rounds, bars and ingots primarily valued for their precious metal content. Coins nominally issued as legal tender are also considered bullion, although their precious metals content is worth far more than their face value. The American Gold Eagle for example has a face value of $50 and contains 1-troy ounce of fine gold. The precious metals value of this coin in January 2011 was approximately $1400.
The amount of silver you can buy with one ounce of gold, based on present spot prices. Ex: a gold-silver ratio of 50 means that one ounce of gold would buy fifty ounces of silver at present prices.
The pre-1933 United States $5 gold piece.
Any silver product that contains less than 90% silver content. Junk silver products usually contain between 35% to 90% silver. Ex: pre-1965 USA coins.
Coins that can be used as national currency. Ex: The 1 Ounce American Gold Eagle has legal tender of $50 USD.
Lettering or inscriptions on the edge of a coin.
The ease of buying and selling a certain product or metal. Ex: 1 Ounce Silver Bars are extremely liquid, as their is a huge active base of both buyers and sellers.
The brilliance of the surface of an uncirculated coin.
The refining or fabricating company which created a certain bar, round, or coin. Ex: Golden State Mint.
A small letter on a coin used to indicate the specific mint where the coin was struck.
A U.S. Mint issued set that includes a coin of each denomination produced by each mint in that specific year.
The “front” side of a coin, usually bearing a head or face design.
A mint located in Perth Australia that produces the Kookaburra, Koala, and lunar series coins amongst other bullion items.
Paper Precious Metals:
Any precious metal investment that doesn’t result in the investor holding gold or silver in hand. Ex: precious metal ETFs, precious metal certificates, etc.
A gold coin dated 1933 or earlier. After this date, the US did not produce any gold coins until 1986 with the release of the American Eagle gold bullion coin.
A coin that has been struck with greater pressure than normal using special dies to make the design more highly polished. Proof coins are collectibles and trade at a higher premium than brilliant uncirculated or circulated versions of the same coin.
The gold or silver content contained within a bar, round, or coin. Usually displayed as .XXX. Ex – .999 1 Ounce Silver Bars, indicating 99.9% purity.
The pre-1933 United States $2.50 gold piece.
The vertical grooves that run along the edge of a coin.
The “back” side of a coin, with an alternate design usually displaying the coin’s purity and face value.
The live, up-to-date price of gold or silver. Determined by the latest trades on the futures market as well as over-the-counter markets.
A coin meant for normal circulation that has never been used in commerce and still maintains its original luster and appeal. Also referred to as Mint State (MS).
The stamped weight of a bar, round, or coin. Ex: 1 Ounce Silver Bars.
The year of issue for a gold or silver coin. Ex: 2012 Silver American Eagle