Investing in Gold: The premium plays on $20 gold coins

With gold prices at all-time highs, many people think the value of their $20 gold pieces must also be at records levels. This logic does not always apply.

The premiums of $20 gold coins are affected by many factors, only one of which is the price of gold. It truly comes down to the most basic economic principle, supply vs. demand.

When gold reached $800 an ounce in 2008 there were sellers abounding, which drove the premiums of $20 gold coins down. Many had bought gold back in the boom of 1979-'80 and were waiting until they could recoup their investment. When the chance came, for many it was time to sell. But conversely, when gold achieved the $1,000 mark in 2009, the premiums on $20 gold coins began climbing due to the fact that many felt gold was going to continue to rise.

By the end of 2009 the price of gold had climbed to $1,200 and the price for $20 gold coins had reached the highest levels in recent history. This spike in pricing was due mostly to telemarketing in the U.S. As the price of gold was climbing, a host of marketing companies were trying to sell older gold coins to new customers. When this host of new investors was entering the market looking for gold, many were buying bullion gold with low premiums over the price of gold.

But hard marketing companies were pushing to sell the older $20 gold coins where they could make up to 30 percent over their cost. Since these newer investors did not know the premium history of these coins they were lead to believe that the older coins were a better buy. Meanwhile, most everyone who has traded in gold coins over the last 20 years were trying to cash in on the outrageous premiums the $20s were bringing.

Eventually the two collided. In January 2010 the premiums on $20 gold coins started coming down. Most of the new money entering the gold arena had been spent and now the demand for the older $20 gold coins began to wain. European holdings began to flood back into the U.S. and today even when gold reached $1,400 one could buy $20 coins cheaper than at the end of 2009 when gold was only $1,200. Supply now was outweighing demand.

Stories of $20 gold coins being rare are more common than the $20s themselves, but in truth many of our $20 gold coins are still around. When we left the gold standard in the 1930s many of the European countries demanded that their debt be paid off in gold. Hence, many of our gold coinage crossed the Atlantic. Now that Americans are buying gold many of these Europeans are selling back into our markets.

And with gold prices on the rise many have been brought back in the last few decades. Knowing when to buy bullion or older gold can be tricky, but with a little help one can make a wise decision as to which is the better buy, and trading in and out at the right times can become very profitable.

• Allen Rowe is the owner of Northern Nevada Coin in Carson City.