Why You Should Consider the Liquidity of Gold

Based on all the ups and downs in the financial markets during the last couple of years, many people who have a pension or a retirement fund have recognized the value of gold as a stable investment during volatile economic times.

They’re also typically aware of how well gold has performed recently, so they’ve begun to look into the specifics with an eye on starting to invest.

Many of those same investors know that gold is a highly liquid asset, but some don’t know the details about what that means or how it works.

With that in mind, let’s take a deeper dive into the world of gold liquidity and see how this functions in the world of high finance.

What Makes Gold a Liquid Asset?

While there are many factors involved in determining the liquidity of an asset, they can be narrowed down to two primary issues.

One is a relative absence or presence of consistent buyers and sellers. A market with many buyers and sellers is considered liquid, and that’s obviously the case with gold. Few people realize just how many gold buyers there actually are. The gold bullion market is recognized around the world, with the spot pricing specified in a dollar number known as the price per troy ounce of gold.

The second factor is the presence of a stable pricing scheme, which is also an essential element of liquidity. Unlike assets such as fine art, rare coins, or sports collectibles, there’s a stable pricing mechanism, and in the gold world and the investment world in general this is known as “spot price.” It allows all potential investors to check the price of a stock or a commodity at any point in time, with everyone coming away with the same number.

Another element of liquidity is that spot pricing tends to ensure a floor in gold prices. That means that even if traders have trouble finding buyers quickly, they can always sell their coins as scrap gold and get a value equal to the spot price minus the cost to melt down the coins.

Legal Tender and Liquidity

Now let’s talk about legal tender, which is another important element of gold liquidity. Both American Eagle and Canadian Maple Leaf gold coins, for example, are recognized as legal tender, which means you can take them into a coin shop almost anywhere in the world and get a fair price for them.

Yet another factor in this element of gold liquidity is the coins that are issued by private, non-government mints. While this might sound riskier, these coins—which are known as “rounds”— actually tend to rise over time, based on the fact that they contain nearly as much gold measured in medal weight as their government counterparts. They’re actually one of the most liquid forms of gold available, largely because they’re mostly ungoverned by market forces, both defined and regulated and otherwise.

The one exception in this category is commemorative coins, which you should try to avoid if you’re a serious investor. These coins are based on a specific event—e.g., the Olympic Games—and vendors often charge a higher premium for them based on their perceived rareness. But savvy buyers looking to accumulate gold will usually refuse to pay that price, meaning they become harder to sell as part of the overall market.

The Value of Gold Liquidity

While liquidity is an important part of any gold investment, it’s typically hard to evaluate for amateur or casual investors. And given the universality of the gold market as a whole, accumulating a large amount of gold that has extensive liquidity shouldn’t be the major goal for any serious investor.

So what should? Pricing, of course, along with the return. Having plenty of gold that offers quick liquidity is a good thing to focus on as a secondary element of your portfolio, but your primary emphasis should be on getting the best possible value.

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