Physical gold assets, such as gold coins, are an excellent addition to any investment portfolio. Gold is a stable store of value, a hedge against inflation and deflation, and a historical long-term investment.
One of the options available to physical gold buyers on the market is small gold coins, also known as fractional gold. These coins are popular alternatives to gold bars and classic 1-troy-ounce coins; however, it is critical to understand their advantages and drawbacks before investing.
Learn the pros and cons of buying small gold coins to diversify your investment portfolio and where to invest in gold assets in Michigan.
What Are Small Gold Coins?
Small gold coins, also known as fractional gold coins, are a popular gold asset category that comprises gold coins and rounds containing less than 1 troy ounce of gold. Before investing, it may be helpful to understand their relation to gold prices and industry standards, such as the troy ounce.
Why the Troy Ounce is a Standard
The troy ounce is the industry standard of mass for all precious metals in the United States, such as gold, silver, and platinum. 1 troy ounce equals approximately 1.097 standard (avoirdupois) ounce.
When checking the price of gold on the market, the listed value is always per troy ounce. Troy ounces are preferred over standard ounces for precious metals because it is an internationally recognized unit designed to standardize gold quantities and purity.
Most standard gold coins are made using troy ounces. When you buy gold coins such as the American Gold Eagle or a Canadian Gold Maple Leaf coin, the dimensions are designed to ensure they contain precisely one troy ounce of fine gold, making their melt value equal to the current spot price of gold.
Due to the relatively high price of gold, having a few coins equates to multiple thousands of dollars. For example, if you owned 4 troy ounces of gold on November 15, 2022, the price of gold at the time was $1,773.77 per troy ounce, meaning your gold was worth $7,095.08.
However, the high price of gold means that selling a 1 troy ounce gold coin is an impractical choice for lower-value trades or barters ($1,000 or less). For newer buyers, the value of a troy ounce of gold may also be prohibitively expensive.
The Role of Small Gold Coins
Small gold coins exist in various denominations, the most common being ½, ¼, and 1⁄10 troy ounces. The primary purpose of these gold coins is to serve as smaller stores of value than standard, 1 troy ounce coins.
These fractional denominations allow gold investors to trade the equivalent of smaller amounts of money and avoid selling their larger, more expensive coins. New buyers looking to invest lower dollar amounts in gold can use small gold coins as a more affordable starting point, making it possible to invest in gold with smaller budgets.
Types of Small Gold Coins
Small gold coins are categorized into two groups, depending on their country of origin and the local weight standard utilized: coins denominated in fractions of troy ounces and coins in grams.
Fractional Troy Ounce Gold Coins
Gold coins containing fractions of troy ounces in gold bullion are available in denominations such as ½, ¼, 1⁄10, 1⁄15, and 1⁄20. Denominations smaller than 1⁄10 are rarer and may be sought after by numismatists and collectors.
Well-known examples of each denomination include:
- British Royal Mint Britannia ½ oz. gold bullion coin
- United States Mint ¼ oz. American Gold Eagle coin
- South African Mint 1⁄10 oz. Krugerrand gold coin
- Royal Canadian Mint 2 Dollar 1⁄15 oz. Gold Maple Leaf
- Mexican Mint Dos Pesos 1⁄20 oz. gold coin
Metric Small Gold Coins
Many countries produce bullion using metric denominations, such as grams and kilograms. Standard-sized metric gold coins are typically 30 grams, very close to a troy ounce (about 31.1 grams).
The metric equivalent of fractional gold coins is typically 15 grams or less. Common denominations include 3 gram, 5 gram, 10 gram, and 15 gram.
Some examples of metric small gold coins include:
- Chinese Mint 15 gram Gold Panda coin
- Indian Government Mint 10 gram Diwali gold coin
- Mumbai Mint 5 gram Akshaya Tritiya gold coin
- Chinese Mint 3 gram Gold Panda coin
The Pros of Buying Small Gold Coins
Investing in small or fractional gold coins presents multiple advantages to gold investors, buyers, and collectors over traditional gold assets, such as gold bars or standard gold coins.
Because they are a fraction of the cost of a standard 1 troy ounce gold coin, the primary advantage offered by small gold coins is that they provide a convenient way to store relatively small dollar values. This makes them much more flexible for smaller expenses.
For example, on December 13, 2022, the spot price of gold was $1810.29. If you needed to raise $400 to cover an unexpected vehicle repair bill on that date, selling a ¼ troy ounce gold coin would have netted you approximately $450, making it close to the target amount.
In contrast, a standard 1 troy ounce gold coin would have been worth about $1,810.29, far exceeding your target amount.
Just as small gold coins are better suited for raising smaller dollar amounts, they are also excellent for newer investors with smaller budgets.
If you are interested in buying your first physical gold assets or wish to invest $1,000 or less in gold, small and fractional gold coins are an excellent option.
Many well-known gold coins are also available in miniature versions with fractional gold quantities. For example, as of January 2, 2023, the standard $50 American Gold Eagle has a spot value of approximately $1,823.69. Since it is 1 troy ounce, it is valued at the spot price of gold. However, it is crucial to remember that when buying gold coins or any other type of bullion, there is a buyer’s premium on top of the spot price.
Fractional versions of the American Gold Eagle include the following:
- $25 American Gold Eagle: ½ troy ounce of gold, spot value of $911.85 (.5 x $1,823.69)
- $10 American Gold Eagle: ¼ troy ounce of gold, spot value of $455.92 (.25 x $1,823.69)
- $5 American Gold Eagle: 1⁄10 troy ounce of gold, spot value of $182.37 (.10 x $1,823.69)
If you are a resident of Michigan, state legislation exempts you from paying sales tax when buying gold coins, provided they meet legal requirements. This tax benefit can help you reduce the premiums associated with buying gold coins, saving you money.
According to the Michigan Legislature (MCL 205.54s), investment coins are numismatic coins or legal tender currency made of precious metals such as gold, silver, platinum, or palladium. These items can be produced in the U.S. or by a foreign mint. However, for tax purposes in Michigan, investment coins exclude non-currency coins, such as gold rounds.
To qualify for tax exemption, the purity of the precious metal in the coin must be 900 or higher. An example of a qualifying coin is the $10 American Gold Eagle, which uses 22-karat gold alloyed with silver and copper, giving it a purity of 916.7.
Although small gold coins contain less pure gold than the standard quantity of 1 troy ounce, each is a distinctive numismatic object with its own appearance, name, and face value.
Every gold coin is unique, and each fractional denomination is distinct from the others, even within the same series. Many gold coins of the same series and denomination may also have differences depending on the minting year, even beyond displaying a different year on either side.
For example, one of the most significant differences between British Sovereign gold coins is the profile of the UK monarch at the time of minting. An 1817 coin features George III, whereas a 2019 coin displays Elizabeth II.
These properties make fractional gold coins highly desirable for collectors and numismatics enthusiasts looking to complete sets. Depending on their age and rarity, specific coins may fetch a much higher price than their gold value plus typical premiums.
Potential Cons of Buying Small Gold Coins
While small and fractional gold coins can have many benefits, it is essential for investors and gold buyers also to be aware of the potential drawbacks of choosing this type of gold asset.
Although small gold coins require fewer materials to produce than standard 1 troy ounce coins, the manufacturing costs are about the same.
When buying a small gold coin, the amount you pay to cover the markup is proportionally higher. On average, mints charge a 9% to 25% markup over the coin’s spot gold value.
Gold investors view this relatively high markup as an undesirable effect of buying small gold coins due to being unrecoverable when selling or trading.
More Vulnerable to Wear and Tear
Fractional gold coins feature smaller dimensions than their standard-sized counterparts, meaning owners must take greater care in protecting these assets from damage or general wear and tear. You may need a cloth-lined storage container with separate compartments or hard plastic holders for your collection.
Alternative Gold Investments to Grow Your Wealth
If you decide against investing in small gold coins, multiple alternative gold assets are available to diversify your portfolio. These additional physical gold investment options include gold bars, rounds, and jewelry.
Gold bars are the most popular form of gold for investment. This commodity is held by national governments and their central banks as a store of value due and offers the most convenient form for buying large sums of gold.
Like coins, gold bars are manufactured from gold bullion, with a minimum purity of 995. Most gold bars are either 999 or 999.9 pure to ensure their value aligns as precisely as possible with the current spot value of gold. They also come in many denominations in either troy ounces or metric units, ranging from 1 troy ounce to multiple kilograms.
Gold bars are also not considered to have the same collectible value as gold coins, as they do not usually feature unique or visually appealing designs. However, this is not necessarily negative, as it emphasizes their purpose as stores of value and investment assets.
The cost of gold bars depends on the size you purchase and the market price of gold. For instance, on January 4, 2023, gold was worth $1,856.58. A 5-troy-ounce gold bar sold on that date would be worth about $9,282.90.
Although gold rounds may closely resemble in shape and size, gold investors need to understand their differences to make the best investment.
The primary differences between the two are their legal status. A gold coin is minted by a government, has a face value, is legal tender in its issuing country, and often has additional value as a collectible.
The best way to view a gold round is to think of it as a coin or medal-shaped gold bar: they have no face value, can be made by governments or private entities, and their value is primarily derived from their gold content. Types of gold rounds include commemorative coins, medals, and tokens. Each may feature a wide variety of sizes, weights, and designs.
Investors interested in buying gold rounds must ensure the coin’s manufacturer is reputable to ensure the coins have the gold purity, build quality, and liquidity needed to be worthwhile investment assets.
Although experts may not consider gold jewelry the best type of physical gold asset purely from an investment point of view, it is one of the most personally satisfying.
Gold jewelry is intended to be worn and displayed on your person, making it a personal investment with more psychological than financial benefits. This single trait makes it much unlike coins, rounds, or bars, which are gold assets designed mainly for easy stacking and storage.
Gold jewelry is less desirable as an investment asset because the gold purity in each object can vary significantly. In many cases, the type of gold used is of lower purity than bullion, such as 14-karat (585 purity) or 18-karat (750 purity). These types of gold, often alloyed with harder metals such as copper or silver, are preferred to increase the jewelry’s hardness and resistance to wear and tear.
However, the gold content in jewelry still functions as a worthwhile store of value, making it possible to sell them and raise cash for emergency expenses. Depending on the manufacturer, model, and age, many types of gold jewelry may be considered collectible or more desirable, potentially increasing their value. Examples include vintage gold bracelets and gold watches from a rare or low-production series.
Invest in Gold with AU Precious Metals
Whether you invest in small gold coins, gold bars, or numismatic gold coins, buy from AU Precious Metals. Our knowledgeable staff has years of experience in the precious metal industry and can guide you through the investment process, including which gold items offer the highest return on investment and portfolio growth.
Contact us online or stop by our Novi or Rochester, Michigan, location to discuss your gold investment goals and start building your wealth today.