British Gold Sovereigns
The Preserve of Collectors, Savers and Smart Investors

Mark O'Byrne
Aug 15, 2008

Gold as Essential Diversification and Financial Insurance

Gold bullion remains an essential diversification and essential financial insurance to have in all properly diversified portfolios. Besides the ever more important factors of inflation hedging and financial insurance, gold is likely to continue to outperform other asset classes and to provide significant returns to gold buyers.

Many of the world's major investment banks are in agreement that gold is again in a long term multiyear bull market. Many believe gold will surpass its inflation adjusted 1980 high of $2,400/oz in the coming years.

Citigroup's former head of technical research and managing director of Yamada Technical Research Advisors LLC., Louise Yamada sees gold on its way to $3,000 within a decade. "Gold is the purest play against the dollar," said Louise Yamada, Yamada is highly respected and was voted Wall Street's best technical analyst from 2001 to 2004.

Credit Agricole's (France's largest bank and the fourth largest bank in the world) brokerage, Cheuvreux see the possibility of a rise to $2,000/oz or higher.

How to Invest in Gold in Preparation for $2,000/oz Gold

Gold and Silver Investments Limited agree and believe gold will surpass its inflation adjusted high of $2,400 per ounce in the next 5 years.

This is why we continue to advocate investors continue to diversify and increase their gold holdings. So, how should one invest in gold?

There are many different ways to invest in gold and one's motivation for buying gold should dictate how one buys gold. Are you a speculator, investor or saver? Are you buying to make a capital gain or as a hedge against systemic risk and using your gold as financial insurance? Is your motivation a little of each?

ETFs, mining funds, digital gold, Perth Mint certificates, gold bullion coins and bars in one's possession and or semi numismatic gold coins are good ways to buy gold.

Given the extent of current macroeconomic and systemic risk a diversified precious metals holding makes sense and it should not be a question of "either or" rather a combination of these various ways.

Having eggs in various gold baskets, so to speak, is the most sensible and prudent strategy.

As part of this mix, older gold coins should be looked at. Classic European and world gold coinage is an often overlooked but extremely important sector in today's gold market. Pre 1933 and 19th Century European and world gold coins are an intelligent alternative to modern gold bullion coins or bars as there is often more room for appreciation with these beautiful old coins due to their rarity and yet they can often be bought at bullion prices.

2008 Gold Proof Sovereign depicting Saint George
photo courtesy of The Royal Mint

Importantly from an investment point of view is the fact that gold bullion and older gold coins are not subject to VAT due to the EU Gold Directive. Even more important is the fact that unlike the other forms of gold investment outlined above, British gold sovereigns are also not subject to capital gains tax (CGT). Thus all post-1837 British gold sovereigns, due to them being legal tender. and having a legal tender face value, are capital gains tax free, which is obviously a massive benefit to investors vis-à-vis other gold investments.

The prices of these beautiful coins are only slightly more expensive than modern gold bullion but offer many advantages. Besides not having to pay CGT, other advantages include increasing scarcity, aesthetic value and historical significance. European and British gold coins are recognised as one of the most advantageous ways to invest in "bulk" gold, by sophisticated investors.

European, American and world gold coins are bought by both collectors and investors at a small premium to the price of bullion coins. Perhaps the most popular semi numismatic gold coins internationally are British sovereigns.

The British Sovereign (originally the one pound coin) is the most widely traded semi-numismatic gold coin in the world. There is constant and excellent liquidity in most countries in the world. For the investor looking for slight leverage to the gold price with the potential for the premium (numismatic value) to rise, British sovereigns are a good way to invest in gold.

History of the British Sovereign - From Henry VII to James Bond

The first British sovereigns were minted more than 500 years ago. They were minted under Tudor King Henry VII in 1489. The coin got its name from that first mintage which depicts the monarch seated majestically on the throne facing outward.

Sovereigns were then struck for Henry VIII from 1509. Henry VIII needed to raise revenue as he was engaged in George Bush style overspending which led to a flow of gold and silver to Europe (equivalent of dollars to Russia, OPEC nations and China today).

The current design type with St. George slaying a dragon on the reverse and the monarch on the front was introduced nearly 200 years ago in 1816 under George III. The sovereign was minted almost continuously from that date until 1932 when Britain went off the gold standard.

Sovereign, 1558

Thus he was responsible for debasing and devaluing English money when he reduced the precious metal content from 23 carat to 22 carat to 20 carat (96% to 91.6% to 83.33%). Silver coins were debased even more and by 1551 silver coins had been reduced to 25% of their face value in what became known as the 'Great Debasement'.

British sovereign 'kings' minted during the reigns of Edward VII and George V are probably the most widely owned and recognized pre-1933 gold coins.

In 1816 the British sovereign as we know it today was first introduced, and as the British Empire expanded under Queen Victoria during the 1800's, this coin came to be the world's most widely distributed gold coin. Minted originally in London, the sovereign came to be minted all over the world as Australia and South Africa came to be large gold producers. Mints in Pretoria, Bombay, Ottawa, Melbourne, Sydney and Perth minted thousands of sovereigns during the late 1800's and early 1900's.

The design of Saint George, aboard his brave steed, slaying the dragon is common to the reverse of all variations of the coin. Saint George who is believed to have lived from 275 to 303 AD was a soldier of the Roman Empire, from Anatolia, now modern day Turkey. He was venerated as an Islamic and Christian martyr.

George was immortalised in the tale of George and the Dragon in a collection of hagiographies and lives of the saints known as The Golden Legend or Legenda Aurea. He is the patron saint of Canada, Catalonia, England, Ethiopia, Georgia, Greece, Montenegro, Portugal and Serbia, as well as a wide range of professions and organisations. This gives sovereigns an international appeal not enjoyed by many coins.

When coins were sent to places such as the United States for international payments between governments, coins were frequently melted down into gold bars because of the Federal regulations then in force. When gold coins were finally withdrawn from circulation in 1933 in the US, many thousands of British gold sovereigns were consigned to the melting pot in this way.

Gold sovereigns were accepted as money and as payment throughout the world at the height of the British Empire and indeed this international currency may have helped create and strengthen the Empire.

More recently, many armies around the world (including the US Army) gave their servicemen an emergency supply of gold sovereigns. They are still recognised in most parts of the world and unlike paper dollars will not be damaged by shredding, water or intense heat.

This is why Q gives James Bond 50 gold sovereigns in From Russia with Love. Near the beginning of the movie Q gives Bond a special black briefcase. Hidden in the case are 40 rounds of ammunition; a flat throwing knife; an AR-7 folding sniper's rifle and imbedded in 2 straps hidden inside the lining of the case are 50 gold sovereigns.

Conclusion

It is estimated that only 1% of all gold sovereigns that have ever been minted are still in collectible condition. It is this relative rarity in relation to bullion coins and bars that leads to leverage whereby in gold bull markets, the value of these coins increases by more that the actual price of gold.

Unlike paper investments or speculations, British gold sovereigns have a real and permanent tangible value. Therefore, they offer two ways to build wealth. They can offer the best of bullion and numismatics in one investment. They contain the intrinsic security of bullion or precious metal in a pure form and can also offer additional profit potential due to their aesthetic and historical appeal.

The legal tender gold British sovereign has always been a popular coin for collectors and is becoming increasingly popular with risk conscious value investors seeking to avoid having to be capital gains tax (CGT).

Today premiums remain very low on the world's most famous gold coin and even beautiful Queen Victoria sovereigns from the second half of the 19th century can be bought at great value bullion prices, near spot or melt value.

Experienced, knowledgeable investors have long known that semi numismatic gold coins can be solid investment choices. They retain their value in times of global geopolitical instability and when there is economic uncertainty, during systemic and monetary crises and in recessions and depressions. With systemic risks increasing and more bank runs possible in the coming months, the wisdom of holding a few gold sovereigns in one's possession or in a depository will be clearly seen by all.

It is important that investors look at their portfolios holistically and have a financial insurance component to their portfolio. Used correctly, a small allocation to British sovereigns can be a highly effective component of a properly diversified investment portfolio.

Mark O'Byrne
email: info@gold.ie

Mark O'Byrne is Executive Director of Gold and Silver Investments Limited (www.goldassets.co.uk).

321gold Ltd