A bit of history
The first gold coins in the world found their way into the pockets of the Lydians, the citizens of a kingdom related to ancient Greece and located in modern-day Turkey. It’s not like the concept of money did not exist before – some 5,000 years ago shells were used in ancient China as a form of currency and Mesopotamians had developed a type of banking system where people could “deposit” livestock, grain or jewellery for safekeeping or trade.
However, with the emergence of increasingly complicated societal structures these primitive forms of money were no longer sufficiently structured or objectively fungible. There was a growing need for a monetary system closer to what we know today and that is how coins came to be. Since these ancient times and up till now, coins and banknotes continue to serve three basic purposes – a medium of exchange, a unit of account and a store of value.
Hoarder or Numismatist
The first step in coin investing involves a fundamental question – is the investor looking at coins through the perspective of a hoarder or a numismatist?
Hoarders are buyers who are only interested in the underlying value of the base metals used to mint the coin. Pennies are most desired by these individuals as they have high copper content but at the more expensive end of the scale gold coins and silver coins can also be held with this aim. The basic principle of hoarding is that in the worst-case scenario the coins will retain their face value and if metals markets move in the right direction, the owner could make a tidy profit by having the base metals melted down and sold. It is pertinent to note that the Royal and US Mints have both deemed the act of melting the national currency a criminal activity subject to fines and imprisonment.
In the US it is not only forbidden to melt down coins but also to ship them outside the country – travellers can carry a maximum amount of $5 in nickels and cent. This rule closes a loophole in the law, which would have otherwise allowed some “entrepreneurs” to move large quantities of small change to another country where US laws don’t apply. The US Mint made the move to protect itself against arbitrageurs for whom the margin on the value of copper and nickel will be large enough to massively stock up on the small change and profit.
Gold coins and silver coins are different in that they are not general issue coins with a face value but are sold by the Royal Mint or dealers with a value connected to the weight of the metal. The 2012 UK £2 gold proof Charles Dickens coin, for example, has a listed price of £995 on the Royal Mint website. The acquisition of these coins is a pure play on gold and silver prices.