What You Need to Know About Buying Gold Coins

Gold prices are up about 15 percent in 2016 on economic turmoil, making the metal one of the strongest market performers this year.

Those gains have some analysts convinced that gold may have some staying power. It has been more than four years since gold peaked at more than $1,900 an ounce, and commodities newsletter writer Dennis Gartman says the higher trend in prices suggests "the bullish case for gold is becoming easier and easier to make and to hold firmly to."

Demand for gold-backed exchange-traded funds is strong this year, but so is the demand for gold coins. Data from the U.S. Mint show that January sales for its American Eagle bullion gold coins were the highest since 2013. Traditionally, gold coins sales are strong in the beginning of the year as investors and collectors like to buy newly dated coins, but Terry Hanlon, founder of Dallas-based Dillon Gage, a precious metals trader and refiner, says coin demand is unusually strong.

"It really is amazing," he says. "Last year was really an active year, and this year, for the first 30 days to 45 days compared to same time last year, we're up about 20 to 25 percent in most categories. ... We deal worldwide, and some of this has to do with what's going on in different parts of the world."

Some people prefer to own physical coins, especially if their reason to own gold is an insurance policy against a worst-case scenario, such as currency devaluation, war or other civil strife.

"If I'm holding it in my hand, someone else can't pledge away what I own. It won't disappear. It's the rock-bottom security that what's in my hand has a value and has had a value since the time of Tutankhamen. Thirty-five hundred years is a pretty good track record for me," says Pete Thomas, senior vice president at Chicago-based Zaner Precious Metals.

For people who are interested in buying coins, it's important to know there are two distinctively different markets. Investors seek gold bullion coins that reflect gold's market value, called the "spot" gold price. Numismatic coins are collectables, and they can also have a price premium (or discount) attached to them depending on their rarity and conditions.

Buying bullion coins. Thomas and Hanlon say new investors should stick to sovereign coins. Those are coins struck by major global mints such as the U.S. Mint, the Royal Canadian Mint and the Perth Mint. Coins made by those mints are easy to buy and sell, and they are known even to people outside of the coin world.

Bullion coins are only sold through coin dealers since the various mints sell their bullion coins to wholesalers. They sell them to third-party dealers who sell to the public.

Coin dealers will list the spot price for gold on their website, along with their bid and ask prices, which is how much they are willing to buy and sell coins for. Those prices will give buyers an idea of the value of certain coins. Those prices will include a premium. That premium reflects certain costs like manufacturing, fabrication, packaging, administration, security and storage, among other factors, Thomas says.

Both Thomas and Hanlon say investors should take into consideration a few factors as they look for a metals dealer beyond who has the cheapest price, considering things such as dealer reputation and how long the dealer has been in business. A few other questions buyers can ask retailers include if they maintain inventory and if they buy back their coins.

"If so, ask what his normal bid is. If you're buying a one-ounce gold Eagle or Maple Leafs at $30 over [the] spot [price], ask what are they buying back at and what levels? They have to quote a price. The closer the spread, the more legit a guy is to be in the business and maintain inventory," Hanlon says.

Under the rules passed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, dealers need to ship products to retail customer within 28 days, Hanlon says.

Early-year demand for coins can sometimes exceed supply, and the mints temporarily run out of product. When that occurs, the mints will release coins on an "allocation" basis, meaning they limit sales to wholesalers until the mint can strike more coins. When that happens, sometimes retail dealer premiums rise to reflect that sudden demand.

If that occurs, Hanlon advises buyers to wait until the allocation is over. "People see allocations exist and it's an immediate attraction. ... But as a consumer, wait if you see allocation premiums. There's no rush," he says.

The Internal Revenue Service recognizes certain bullion coins and gold bars as eligible for individual retirement accounts if the coins are held in an IRS-certified vault. Those coins include U.S. buffalo and eagle coins, Canadian Maple Leafs, British Britannia coins, Australian Kangaroos and Austrian Philharmonics.

Numismatic coins are similar to art. Numismatic coin collecting is much different than the bullion market, and Thomas says new coin collectors need to do a lot of research to understand that market. "New numismatic coins are nice gift. Think of them as art with an underlying value based in the metal. You're paying a premium for all the work that went into it."

Hanlon says numismatic coins also fall into two categories: new numismatic coins created and sold by the various world mints as annual collectors' items and antique coins that have a historic value in addition to any rarity or condition the coin is in. Examples of those historic coins are Morgan dollars or St. Gaudens $20 Double Eagle coins.

Fakery can happen in the numismatic coin market, so both Hanlon and Thomas say investors need to know what they're buying. Hanlon says buyers should make sure dealers are members of the Professional Numismatic Guild or the American Numismatic Association for their own protection.

Whether buyers are investors or collectors, owners need to secure their investment. Gold is a soft metal and can get damaged easily. Marks can affect quality, especially for numismatics.

"Keep them in the case. I always recommend the cheapest way, the best way, is to get a safety deposit box. It won't get knocked around, and you don't have to worry about fire or a burglary. When the time comes, you stick your key in, take your coin out and sell it," Thomas says.

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