Beware the lure of royal coin souvenirs

“WILLIAM and Catherine, 29 April 2011” is the heading and description of a gold coin currently being offered to South African investors by the South African Gold Coin Exchange.

But just three days after that fairy-tale wedding, the romantic event was overshadowed by the news of Osama bin Laden being shot dead. Last Friday’s gold coin investor may have been wondering on Monday what had hit him.

Basil Milton, of the SA Gold Coin Exchange, says 3 000 of the William and Catherine coins were minted and 300 of those will be made available to buyers in SA. As usual, he says it’s an excellent investment.

The coins are slightly larger than a Krugerrand, 40g of gold compared with the Krugerrand's ounce, or 32.151g to be precise. The selling price of each William and Catherine is R29 500.

Converting the 32g of the Krugerrand gives a price of R23 600, which is slightly more than twice the intrinsic gold value of around R10 250. That’s also the price at which ordinary Krugerrands are trading on the JSE.

If you or the wife were very excited about the royal wedding, go ahead and buy one of the William and Catherine coins – but treat it as something of sentimental value.

Don’t be fooled by talk of its investment value and then buy a few dozen for your portfolio.

However, having said that there will of course be the coin dealers, who will now take delight in pointing out the success of the Mandela/De Klerk coin. Karen Kruger, also of the South African Gold Coin Exchange, says 500 of the total of 5 000 coins minted were made available in SA.

They’re now selling those coins, which contain 1 ounce of gold, at R32 000 each – which is beyond doubt a fine increase on the selling price over the past decade.

Please note: I specifically said that’s the selling price, because I must still point out the risks of investing in these coins.

Kruger couldn’t immediately give me a price at which the exchange would buy the Mandela/De Klerk back again. Later, she said it would be R21 000 each – because they still have quite a few available for sale.

That’s exactly why I’m so careful about gold coins that are trading far above their intrinsic value. You see, the market price at which you will buy a Mandela/De Klerk is R32 000 but you’ll receive R21 000 when you sell one.

The difference between the buying and selling prices is a massive 35%. That’s the discount on the buying price of R32 000 if you may suddenly want to sell it. However, the difference between buying and selling Krugerrands on the JSE is just 1.5%. You decide for yourself...

Both Kruger and Milton were quick to point out that an investment in icon or other collectors’ coins must be held on to for five to seven years, otherwise you won’t make any money. That’s the kind of thing that makes my hair stand on end.

It’s the same kind of investment advice that financial advisers were giving about Sharemax and PICvest until very recently, and I vividly recall it was also the selling technique used about three decades ago when proof Kruger coins were so popular for a time.
My objections against icon and similar gold coins are based on the following considerations:

•    The icon premium – for want of a better term – is too often created by the coin dealers, who are only too keen to act as sellers.
•    The five- to seven-year investment horizon is often just a way of hiding faults.
•    The buyback price is always much lower than the price you paid and is usually also only for small quantities. That was the case earlier for proof Kruger coins. And the same thing goes for investments in polished diamonds, which are also often put forward as a good alternative against ordinary shares.
•    For example, the kick-off price of the William and Catherine coin – which is double that of the intrinsic value of its gold content – is just too high. It looks as if too many of them were struck.
•    There’s no control over such coins to protect their scarcity value. For example, there’s no reason to think coin dealers won’t create another icon coin in another five years or so. The coronation of Prince Charles could easily become such an opportunity. Or even, more tragically, the funeral of Nelson Mandela.
•    Finally, and most important of all, an investment in gold coins – ordinary Krugerrands or created icons – doesn’t, like my favourite British American Tobacco, pay a dividend every six months that I can use for my ordinary household expenses.

We know that over the next few weeks coin dealers will be pointing out various collectors’ coins that have recorded huge price increases over the past decade or two.

Even the Mandela/De Klerk has done much better than Satrix40 – the easiest and safest investment on the JSE. That’s true: but what we’d like to know is exactly which of the various coins will provide equally dramatic returns over the next 20 years.

* This article was first published in Finweek

* To read more Finweek articles, click here.


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