In the previous article I covered a brief history of gold as currency, the gold standard (that we no longer use to back our US money), and the idea of a Presidential Executive Order is all that is necessary to make possessing physical gold illegal. However, that Presidential Executive Order did exempt:
an amount of $100 per person,coins that had collectible value, imports/exports, and what may be required for legitimate and customary use
For the purposes of clarity, the term coin will be used for currency issued by a governmental entity and the term bullion will be used for metals (usually shaped as rounds or bars) not issued as governmental currency. In the comments section of the previous article, there were some concepts that I thought needed to be addressed before I moved on to the topic of Goldbacks.
Coins that have collectible value
Many children get their start collecting coins with a collection book like this:
Coins have many facets to their value beyond the government-issued value on the face of the coin: composition of the metals in the coin itself; whether the coin is used for circulation; when was the coin minted; how many of that particular coin were minted and how many are left in circulation; if issued as a set do you have the complete set; how circulated is the coin; and how old is the coin itself. The value of a collectible coin is the value of the currency itself PLUS all the above factors taken into consideration.The US government issued silver and gold coins as part of its currency, issuing the gold coins starting in 1795.
Then there are metals, like gold, that are NOT government-issued currency but are shaped like coins (called rounds), bars, or jewelry. Gold bullion is usually found in 1 ounce troy (ozt) sizes or larger. They are minted usually with an indicator as to who minted the bullion and the weight and purity of the metal it contains. If you do not wish to become involved in the complexities of coin collecting, considering plain gold rounds or bars would be an acceptable alternative; however, be aware that plain rounds/bars do NOT normally have collectible value nor are they normally used for commerce.
And 1 ozt of gold bullion does not need to be shaped as either a round or a bar. There are many countries that have become creative in the way they mint their gold:
You would expect two ozt rounds/bars would equal one 1 ozt round/bar but you would be wrong. A premium is applied to the smaller size ( 9 to 25%) over the coins gold value. The production costs are the same; however, as AUPrecious Metals tells us this is simply because Gold investors view this relatively high markup as an undesirable effect of buying small gold coins due to being unrecoverable when selling or trading. Then there is the ease of losing the smallest denominations. As well as the greater wear-and-tear these smaller denominations are subjected to over the life of the coin.
Gold Jewelry
Suffice it to say that gold jewelry is typically not 999.9% 24k gold. While you can exchange your gold jewelry for government-issued money (and sometimes used to barter for goods and services), most people do not. Jewelry tends to have sentimental or keepsake value for people.
There is only so much gold available to be sold to the consumer. Gold is very costly to mine as the TV series Gold Rushcan attest:
The World Gold Councilestimates there are around 216,265 (with about 2/3 of that since 1950) tons of extracted gold as of 2024. They estimate that around 98 tons have gone to jewelry (45%), 49 tons have been used to mint bars and coins (22%), 38 tons to Central Banks (17%), 33 tons to other uses (15%) like electronics & dental, 55 tons to Reserves (gold still in the ground that can be extracted easily), and 133 tons to Resources (how much is still in the ground but will take a bit of effort to attain).
What is a gold spot and why do you have to pay over spot to purchase gold?
Bullion Standardexplains The premium represents the additional cost of acquiring physical gold, such as coins or bars, and typically includes factors like manufacturing, distribution, and dealer markups. They identify Supply and Demand; Type of Gold Product; Purity and Weight; Dealer Markup (including level of service, storage, insurance, and shipping); and Mint and Brand (the more well known the higher the markup in most cases) as contributors to the amount of markup you will be charged on the gold you want to purchase. If you frequent a local mom & pop shop, and become a regular customer, you may be able to receive some reduction in the markup cost.
What happens when you sell (liquidate) your gold?
APMEXexplains there are six expenses involved with liquidating your gold: dealers commissions, bid-ask spread, shipping and insurance costs, storage costs, taxes, and transaction minimums and maximums. Of course, there is a dealer commission but you have to ask about it. If you are dealing online, check the bid-ask spread where the bid is how much the dealer buys it for and the ask is the price at which the dealer sells the gold. Then the spread is the difference between the two. So if the dealer buys the gold at $2000 that is the bid price. If he sells it at $2100 that is the ask price. And ask minus bid prices (or $2100 minus $2000) equals the spread or $100 in this example. AMPEXexplains that there are 8 factors that influence spread. These are market conditions, transaction costs, implications for investors, cost of trading, execution risk, and market sentiment. Again, developing a relationship with a local seller can help mitigate some of these costs.
How do you know if you are being sold counterfeit gold?
The best way to avoid being sold counterfeit gold is to buy from reputable dealers. The GoldBroker suggests looking for the stamp that all gold has indicating the purity (you may need a magnifying glass) but this is not enough. You also need to look for discoloration which would indicate that the piece is simply gold plated. In the past, lead was used to counterfeit gold and it is softer than gold, and thats where the bite it test came in. There is a magnet test since gold does not react to magnets. If the magnet sticks, it's not gold. There is a scratch test where you drag the gold across a non-glazed ceramic plate. If the scratch made is black or grey, it is not a gold coin. Then there is the nitric acid test that experts use (it is dangerous to both you and your gold to try this without training). Or, you can run a density test (which requires special equipment) since the purer the gold is the denser it is.
One method of fighting against counterfeiting was introduced by Isaac Newton in 1698 called reeding which was the process of making ridged or grooved edges to a coin. For gold coins, reeding discouraged scraping of gold flakes from the coin/bullion reducing the weight, and therefore the value, of the gold bullion.
GOLDBACKS - a new way to carry fractional gold for use in commerce
Goldbacks (GB) were first introduced as Voluntary Local Currency in Utah in 2019. Goldbacks are fractional gold instruments created with 24k gold between polymer sheets.
There are now six states that have issued GBs which are now called Special Legal Tender Instruments. They are actual 24k gold. They are valued by the gold standard price (plus a 100% premium over spot). These notes are completely interchangeable. So one 100 GB = two 50 GBs = four 25 GBs = ten 10 GBs = twenty 5 GBs = one hundred 1 GBs. Unlike coins or bullion which have additional fees placed upon them for being fractional values.
In Part 3 of this series, I will discuss the history, construction, cons, & pros of Goldbacks.
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