If you've ever bought an engagement ring or jewelry for a special someone, you would know all about karats. Karat is a measurement of the purity of gold. This is an internationally recognized term, but interestingly enough, the actual measurement of Karat differs from country to country. Keep this in mind, what may be 18 karat gold in the United States might not be 18 karat gold let's say in India. This is very important if you are looking to invest in gold.
When you invest in gold, you have to remember you are investing in the gold content of that alloy you are buying. It doesn't really matter what the other alloy or other metals used to mix with gold is if the whole value of your investment turns on how pure the physical gold that you are buying is.
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Interestingly enough, there is such a thing as 2 karat gold. This is basically a piece of metal that is only 8% gold roughly. The higher the number of karats, the purer the gold. Due to how soft gold is, historically, governments and mints have mixed other metals with gold - this is called the alloy.
The understanding is that once you are buying gold that is at least 20 karats, you can confidently say that you bought pure gold because that is 80% pure gold. The downside historically in buying gold is determining purity. In fact, one of the richest kings in history, Croeseus of Lydia, became rich because he came up with chemical tests for the purity of gold. Since people trading in Lybian gold coins can rest assured that the coins that they are holding contain a guaranteed amount of gold, Lybian coins became very popular and very valuable, this is why Croeseus, the king of Lybia became so rich.
In the same way, the United States Gold Eagle coin collection is, no pun intended, the gold standard in the world of collectible coins because the US government has a law that it would back up the purity of the gold coins that its mints produce. So if you a buy collectible gild coins from the US mint, you can rest assured that if your certificate says that your coin contains a certain percentage of gold, you can be confident that your coin actually contain that percentage of the coin. Gold karat is the measurement of how much gold a particular coin has.
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Since a gold coin's value turns largely on its trustworthiness as a true gold coin, you can probably imagine how important a gold coin's karat rating is. This is especially true if you are buying gold coins from a source that is not included in the Big Three of gold coin collecting: the US, Canada, and South Africa. Thankfully, you can always lean on the concept of gold karats to protect your investment. Since there are so many national mints issuing gold coins nowadays (either in terms of commemorative versions or non-commemorative coins), you really need to be up to speed on the concept of gold karats or you might find yourself losing money down the road.
While a big part of any gold collectible coin's value is not based on its gold content, the gold content and the trustworthiness of the government creating the gold coin still counts for a lot. Don't let these factors count against you when it comes time to unload your gold coin investments.
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There's a common fallacy among people who are newbie gold collectors and gold investors that gold content increases if the weight of a particular block of gold increases, this is not true. Gold content is a percentage so you're not looking at a fixed number. Focus on the percentage or the gold karats in a particular coin or metal slab instead of the weight of that particular item.
Of course, when it comes to valuation, you have to factor in weight along with content. For example, if you invest in a 1 kilogram bullion and you bought a 21 karat bullion, that's 84% gold purity. So if you factor in the weight, which is 1 kilogram, we're talking at least 840 grams of pure gold. You multiply that with the global market price for gold and you have a rough value as to how much your gold bullion will sell for in the market.
Of course you have to factor in other related costs like assay cost and storage cost. You can discount those smaller costs because they impact your overall investment return if you invest in physical gold. Still, gold karat is a good indicator of how much money you stand to lose depending on gold price movements as well as the overall weight of your gold holdings.
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One of the biggest hassles of investing in gold coins is that different countries have different definitions of a gold karat. Considering the fact that you now buy gold coins all over the world, this has become a major issue. If you are thinking of investing in gold coins, you just have to restrict yourself to the usual suspects. Who are the usual suspects? We are actually talking about US Gold Eagles, Canadian maple Leafs and South African Krugerrand.
Now that the global market has been liberalized that even China has a gold coin, Mexico has a gold coin. There are many players in the market, and many of these jurisdictions have different legal standards as to what constitutes a gold karat.
You might be paining yourself on a corner if you but the bulk of your physical gold holdings from a particular jurisdiction because their karat measurement might be different from the US karat measurements. It's always a good idea to park most of your physical gold allocations in US gold eagles or gold coin investments since the US definition of a gold karat carries a lot of weight and very predictable. This is a much safer play.
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