Personal Finance: Market uncertainty makes the future bright for gold

The central banks may be selling, but sales of coins to individuals are

on the rise. Sovereigns and krugerrands are in, says John Andrew

ironically at a time when bankers are dismissing the traditional view of gold being an asset of last resort and a haven against inflation, the European Union has passed a directive removing VAT from investments in gold, which includes bullion coins. After five years of discussions, this was made possible last month when Italy withdrew its formal objection. It is not anticipated that the UK legislation will become effective until January 2000, however.

It is also ironical at a time when central banks are selling their gold reserves, that small investors are buying gold coins. Sandra Ferguson of Spink's bullion department is noting a steady increase in the number of sales to individuals. "Most give the reason for buying as uncertainty. They consider the stock market is high, are worried about the crisis in Asia and are not sure of the impact of the euro." Some also consider gold to be cheap, as this week it was selling at around $287 per ounce, which is only just above its 18-year low of $283 reached in December 1997.

The two most popular buys are the British sovereign and the South African krugerrand. The sovereign is 22-carat gold and its pure gold content is 0.2354 troy ounces. Krugerrands are also 22 carat, but their pure gold content is exactly one troy ounce. In small quantities, sovereigns were selling for pounds 49 each this week, but the price falls to pounds 48 for orders over 50 coins. Krugerrands were retailing for pounds 191, with the unit price falling marginally for larger orders.

Although bullion coins will be exempt from VAT next century, this will only result in a slight reduction in the price investors will pay. This is because despite VAT being imposed on bullion coins in April 1982 - a move that in effect discouraged trade in the material for individuals - a 1995 EU directive gave dealers the option to sell any second-hand item worth less than pounds 500 without collecting VAT on the retail price.

If the item is made from precious metal, it has to be sold above the market value of its metal content. Bullion coins such as sovereigns and krugerrands fall into this category providing that they are not newly minted, or have been imported from outside the EU. Dealers pay the tax on the difference between cost to them and the price at which the coin is sold. Of course, next century when VAT is entirely removed, the spread between buying and selling prices should narrow.

The recent increase in demand for the coins has resulted in a shortage of material in the market. Sellers are currently reluctant to part with bullion coins at these price levels. However, whereas in the past sellers would probably receive the spot gold price or even a sum just fractionally below, they now receive a premium. For example, this week Spink was offering pounds 42 for a single sovereign, a coin with an intrinsic value at the spot gold price of about pounds 41. The 16 per cent spread of pounds 7 on the retail price includes just over pounds 1 in VAT and, of course, handling charges.

While the offer-bid spread is high compared to traditional financial investments such as unit trusts, the fact remains that bullion coins are still the cheapest way for the individual to secure gold. Gold jewellery or accessories retail new at several multiples of the intrinsic value of their gold content. The manufacturers' costs and mark-up as well as the wholesalers' and retailers' profit result in the actual value of the gold being a fraction of the retail price.

Buying gold jewellery or objects on the second-hand market will narrow the gap, but it is the less aesthetically pleasing pieces that sell for the lowest mark-up above the gold value. However, should you follow this route, do buy from a reputable dealer as all that glisters is not gold.

If you want to buy more gold for your money, then the best course is bullion coins as opposed to collectors' coins marketed to consumers by the world's mints. For example, the Royal Mint is currently marketing freshly minted 1998 proof sovereigns for pounds 149 - exactly pounds 100 more than the "old" currency sovereign. That is a large premium for a coin that is identical apart from the date and the fact it is struck from polished dies, resulting in a mirror-like surface.

Of course, the big question is, is it worth buying gold when the world's central banks are selling? With large sales of the metal overhanging the market, there are those who regard gold as the metal that no one wants. However, there are others who are more optimistic. The demand for gold in fabrication - that is for jewellery, dentistry and industrial use - rose last year by 14 per cent to 3,750 tonnes. This compares to new gold mined of 2,400 tonnes during the same period.

The gap between new metal to the market and current consumption could widen as mines that are uneconomic at the present bullion price close. The optimists maintain that if demand increases, the long-term outlook for the metal could be bright.

Spink's bullion department may be contacted on 0171 747 6853

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Joe Cocker performing on the Stravinski hall stage during the Montreux Jazz Festival, in Montreux, Switzerland in 2002
musicHe 'turned my song into an anthem', says former Beatle
News
Clarke Carlisle
sport
Sport
footballStoke City vs Chelsea match report
Arts and Entertainment
David Hasselhof in Peter Pan
theatreThe US stars who've taken to UK panto, from Hasselhoff to Hall
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
News
newsIt was due to be auctioned off for charity
News
Coca-Cola has become one of the largest companies in the world to push staff towards switching off their voicemails, in a move intended to streamline operations and boost productivity
peopleCoca-Cola staff urged to switch it off to boost productivity
Environment
Sir David Attenborough
environment... as well as a plant and a spider
Voices
'That's the legal bit done. Now on to the ceremony!'
voicesThe fight for marriage equality isn't over yet, says Siobhan Fenton
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'