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

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