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​Valuation of semi-collectable and QEII proof gold coins

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I often get asked,

How does an increase in the value of gold (bullion) affect the value of semi-numismatic or proof sovereigns?

So called semi-numismatic or semi-collectable sovereigns, such as Victorian sovereigns or QEII proof sovereigns, have a collector value on top of the bullion value. Although referred to as a ‘premium’, this is different than the premium paid on a normal bullion coin. The premium of a semi-numismatic gold coin is an investment in the collectible market, whereas a bullion premium is just a transaction cost.

Example 1, I sold this 1843 sovereign on 11 August (so called shield or shield-back) for £375.00 when the bullion value (the value of the pure gold content) was £292.13, a 28 % premium.

Example 2, I sold this 2009 proof sovereign graded PCGS PR69 DCAM on 14 July for £287.00 when the bullion value was £264.15, an 8.7 % premium.

Both examples highlight that these coins trade at a premium higher than normal bullion coins (in normal conditions bullion sovereigns trade at 3-3.5 % ).

In order to understand this type of investment better we then ask ourselves, what happens with the value of above coins if gold price increased, for example 10 %?

There isn’t a simple and straight answer. But let me explain how in both examples we need to value bullion value and collector value separately to arrive at the best estimated value.

First, let’s start with example 1.

Bullion value (BV) = £292.13, Collector value (CV) = £82.87, Total value (TV) = £375.00 (an auction realised price is in my opinion the best indicator of market value, but yes, I hear you… It’s far from perfect!)

Gold price increase +10 %, assuming collector value is unchanged

BVnew = £292.13 x 1.1 = £321.34
CV = £82.87
TVnew = £404.21

Now let’s do example 2.

BVnew = £264.15 x 1.1 = 290.57
CV = £22.85
TVnew = £313.42

This highlights the basic way of calculating the value of semi-numismatic gold coins. BUT, it isn’t this easy as we have assumed that the collector value is unchanged, which it often isn’t!

The collector market has different drivers, but like the bullion market is ultimately driven by supply and demand. So here follow some considerations.

Price attachment. In a perfect market, where all participants were hedged and/or acting without any emotional bias to historic prices, premiums would stay relatively stable. However, many buyers of semi-numismatic gold are attached to previous price levels, so changes in price as a response to changes in the gold price typically have a lag. Using our two examples above, short term it will have the effect of shrinking the collector premium (CV) as buyers are reluctant to pay the higher prices (inversely—if gold price was decreasing—prices stay higher longer and premiums increase).

Priced to sell. As investors want to take home profits and buyers sit on their hands, premiums are reduced as unhedged dealers need to turn over their stock. This summer it has sometimes been possible to buy bullion sovereigns at as low premiums as 1-2 %. However, if prices stabilise at the new level, premiums will go back to normal as dealers run out of ‘cheap’ stock.

We have seen shrinking premiums in both bullion and semi-numismatic gold this summer. The effect will be more felt in semi-numismatic gold simply because there is more premium to start with (compare a reduction from 3 % to 1.5 % premium in bullion with a reduction from 50 % to 25 % in semi-numismatic gold and see how it plays out in different scenarios). Aside from lower demand during the holiday period, in my opinion we have experienced the short-term effect of increasing gold prices described above.

Long term, however, it is more important that new buyers are entering the market due to increased media coverage and ‘buzz’ about gold. New gold all-time GBP highs, lowest GBP/USD rate since 1985 (aside from 2016 Brexit blip), inversion of the yield curve and flight to hard assets & alternative investments—such news has much more impact on the bullion and semi-numismatic gold markets in the long term. New buyers are eager to get in and not attached to the previous, lower price levels. As they begin to outnumber those with a price attachment, premiums may well increase to levels higher than they were before increases started taking place.


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