Asset Allocation 

Sovereign investing

Sovereign investing

With gold bullion recently hitting a new high in sterling terms, thoughts are now turning to the next significant objective for the gold price and how best to profit from it. On an inflation-adjusted basis, gold still has some way to go to reach its all-time high, and further weakness in sterling against the dollar can only be good for UK-domiciled holders of the metal.

But of all the ways of buying gold – Krugerrands, gold bullion certificates, gold-related exchange-traded funds (ETFs) – one has been rather neglected, despite several advantages. Gold sovereigns have been around for centuries, but few investors have seen them as a legitimate way into gold.

In fact, sovereigns are the most widely collected British coins. They date from the reign of Henry VII in 1489, but took their present dimensions and weight in 1817, in the reign of George III. Sovereigns functioned as currency until 1915. Production of sovereigns stopped at Commonwealth mints after the Gold Standard was abandoned in the 1930s, but then restarted in the UK in 1957, with sovereigns then being produced as bullion coins off and on since then.

Buying sovereigns is not as straightforward as buying one-ounce bullion coins like Krugerrands, which are the staple of most retail bullion dealers. That's partly because the weight and dimensions are different. Sovereigns have had a standard weight and measurements since 1917, namely a weight of 7.98 grams, a diameter of 22.05mm and a gold content of 91.66 per cent. This equates to a comparable gold content of 0.2354 of a troy ounce. In other words four sovereigns are roughly equal to one Krugerrand. This means that some basic calculations have to be done to make sure the right price is being paid for a coin, particularly if it is being bought at auction (see part two of this feature).

The other complicating factor is that not all sovereigns are traded as bullion coins. Some have a substantial numismatic value – that's to say a value to coin collectors because of their rarity – over and above the underlying value of the weight of gold they contain. As an extreme example, Spink's publication Coins of England, the standard work of reference on coin values, quotes the George III 1819 sovereign in extra fine condition at £140,000 versus underlying bullion value of £176.50. An 1818 sovereign in similar condition is valued, for example, at 'only' £3,250.

The high value of certain dates and types of sovereigns arise from the small quantities that were produced in some years. There are other numismatic wrinkles. An 1848 extra fine sovereign carrying the 'young head' portrait of Queen Victoria is valued at £3,850 – more than 10 times the value of one issued in the same year carrying the so-called 'second head' portrait, introduced that year.

Additional numismatic value is added in the case of proofs and patterns of different years, essentially test pieces produced in small quantities. Sovereigns were also minted in India, Canada, Australia and South Africa from dies sent from the Royal Mint in London. These carry distinguishing marks to indicate where they were produced, and in some years were produced in small quantities according to local needs. Minute errors in the dies used to produce sovereigns also crop up from to time and add numismatic value.

More commonly, sovereigns with a shield on the reverse 'tails' side rather than the more usual St George & the Dragon motif, are also sought-after. Early examples of these so-called 'shield back' sovereigns date from the reign of George IV in 1825 up to half way through the reign of Queen Victoria. The St George motif was reintroduced in 1871. What is more likely to concern investors who want a good value way of buying gold are, however, those sovereigns that sell purely on the basis of their bullion value. Many sovereigns, especially those issued from the early 20th century onwards, are treated in this way, although there are exceptions. A restricted number of sovereigns have been issued during the reign of Queen Elizabeth II, a few of which are considered rarities. A number of others sell at a premium to bullion value, especially if they are in the best condition.

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