Photo Credit (CC 2.0 license): Eric Golub
U.S. Treasury bonds are the 800 pound gorilla of the modern securities market. With the sole exception of global FX markets, the U.S. sovereign debt market is the deepest and most liquid of the capital markets. As of Q4 2017, there are a whopping $14.5 trillion of U.S. Treasury bonds held by the public. The average trading volume in the U.S. Treasury market is a monstrous $500 billion turnover every single day.
The reason that U.S. Treasury bonds hold this hallowed position in the securities markets is because they are direct obligations of the United States, with a superb credit quality rating to match. Of course, the interest and principal of these sterling securities are payable in U.S. dollars – currently the world’s reserve currency. And to date, the United States Government has never defaulted on its debt obligations.
Consequently, U.S. Treasuries are almost universally accepted to settle financial transactions. They are also widely used as collateral in financial transactions, most notably repurchase agreements and reverse repurchase agreements. Both buyers and sellers know that U.S. Treasury bonds are money good. They are the very highest quality investments available in the world of paper assets.
But U.S. Treasuries aren’t the only high quality securities out there. For those investors interested in alternative assets, there is another intriguing option: American Gold Eagle coins. These bullion coins have been issued by the U.S. Government since 1986. They are struck to exacting standards by the U.S. Mint in solid 22 karat gold. The most common size is 1 troy ounce of fine gold, but 1/2, 1/4 and 1/10 troy ounce fractions are also minted. The weight, purity and gold content of all American Gold Eagle coins are explicitly guaranteed by the U.S. Government.
These superlative attributes make American Gold Eagle coins the alternative asset equivalent of U.S. Treasury bonds. For example, the U.S. Treasury market is liquid and deep, meaning that you can place large buy or sell orders without moving the market. American Gold Eagle coins hold a similar position in the precious metals complex.
Between 1986 and 2016, over 25.4 million troy ounces, or 792 metric tonnes, of American Gold Eagle coins were struck. Today, with the spot price of gold trading at around $1,300, this translates into a total market capitalization of over $33 billion. This ensures that there is always a ready supply of these coveted bullion coins available for investment, commerce or any other financial need.
American Gold Eagle coins are also the most internationally recognized form of gold bullion today, giving them a distinct advantage over other gold bullion bars and coins. In decades past, the honor of the world’s most well known bullion coin was held by other market participants. From the late 1960s until the early 1980s the South African Krugerrand was the world’s gold bullion coin of choice. Then, in the early to mid 1980s, the Canadian Maple Leaf usurped the Krugerrand’s title.
But by the mid 1990s, American Gold Eagle coins had come to dominate the global gold bullion coin market. Yes, Canadian Maple Leaf and South African Krugerrand gold coins are still struck today and are widely available in the bullion marketplace. But none of them have the international prestige, instant recognizability and impeccable reputation of American Gold Eagle coins (although the Canadian Maple Leaf comes very close).
Another edge that American Gold Eagle coins have over the competition is their resistance to counterfeiting. Over the last decade or so, fraudulent tungsten-filled gold bars have become an increasingly severe problem in the precious metal market. Most of these fake gold bullion products originate from China, where sophisticated manufacturing equipment and techniques are used to create these counterfeits.
However, gold bullion coins are much harder to convincingly counterfeit than gold bars. In addition, when gold bullion coins are counterfeited, they are less profitable to fake than gold bars due to their smaller sizes and higher technical requirements. But not all gold bullion coins are equally resistant to counterfeiting.
American Gold Eagle coins are some of the most difficult gold bullion coins to convincingly forge. In contrast, the South African Krugerrand has suffered from a significant number of counterfeits because it is less technically challenging to forge. Having said that, there are a few examples of counterfeit American Gold Eagle coins floating around. But these fake American Gold Eagles are generally fairly easily to distinguish from genuine coins due to their lack of crisply struck details and off-color gold.
Up until now, this article has been exclusively about the bullion version of American Gold Eagle coins. And while they are certainly an excellent choice for alternative asset investor, I also want to take a moment to talk about their close cousins – proof American Gold Eagles.
Proof coins are pieces that have been specially struck in order to appeal to coin collectors and connoisseurs. The proof versions of American Gold Eagle coins have superb details, frosted finishes and have been hand inspected for defects. In short, proof American Gold Eagles are the very best coins that the U.S. Mint can strike.
Some gold buyers dislike these coins because they are priced (slightly) higher than their bullion counterparts. As a result, if you only want to acquire the maximum number of ounces of gold for the minimum amount of money, proof gold coins of any type make little sense. However, I have a different viewpoint.
I believe that proof American Gold Eagle coins are the alternative asset equivalent of Treasury Inflation Protected Securities (TIPS) in our Treasury bond analogy. TIPS are bonds that pay interest based on a fixed real rate and a floating inflation-linked component. Many investors like TIPS because they offer an explicit, after-inflation return and can potentially outperform traditional Treasury bonds under the right circumstances.
Similarly, proof American Gold Eagle coins give savvy investors two different vectors for appreciation. Like other gold bullion coins, proof American Gold Eagles benefit from any increase in the price of gold bullion.
But they also have the potential for numismatic appreciation – the possibility that their embedded collector’s premium will increase. This second avenue of return potential is completely independent from the underlying price of bullion – an attribute known in the financial industry as non-correlation. Non-correlation is a highly prized attribute among alternative assets.
With so many excellent attributes, it is easy to envision a future where American Gold Eagle coins are the bedrock of the alternative investment industry. A variety of different sizes, from 1/10 to 1 troy ounce, are available in large quantities in the marketplace. They are always struck to the very highest standards, with a gold content that is guaranteed by the U.S. Government.
I believe it is obvious that American Gold Eagle coins will naturally become the alternative asset of choice for investors seeking a safe, low-risk, cornerstone investment for their portfolios. Regardless of whether you choose the bullion American Gold Eagle or the proof version, I don’t think you can go wrong.
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