Eric Sepanek
SBC Founder
Eric Sepanek is the founder of Scottsdale Bullion & Coin, established in 2011. With extensive experience in the precious metals industry, he is dedicated to educating Americans on the wealth preservation power of gold and silver.
The popularity of fractional gold assets is surging rapidly alongside the value of gold. As the cost-per-ounce of this shiny metal gets more expensive, smaller denominations of gold coins and bars become more appealing to investors. Fractional gold seems like the perfect solution for budget-conscious investors or those looking for gradual exposure to the precious metals market. However, understanding the full range of advantages and downsides of this asset type is crucial for making intelligent investment decisions.
What is fractional gold?
Fractional gold refers to gold coins or bars that contain less than one Troy ounce of gold. For centuries, this has been the standard denomination for gold assets. The spot price of gold is even calculated in dollars per troy oz.
Relatively recently, private and public mints have expanded their offerings to include smaller gold products to give investors more options at varying prices. Common sizes of fractional gold coins include 1/2 oz, 1/4 oz, 1/10 oz, 1/20 oz, 1/25 oz, and 1/40 oz. Similarly, fractional gold bars often come in 1/2 oz, 1/4 oz, and 1/10 oz sizes although many are measured using grams.
Fractional gold products are designed to give investors easier access to the advantages of physical gold. This is becoming increasingly appealing as gold prices continue to rise. It’s worth noting that fractional gold nearly always comes in bullion form which means these assets are only worth their melt value.
Advantages of Fractional Gold
Increased Accessibility
The biggest advantage of fractional gold is accessibility. Smaller denominations make gold more affordable to investors in a wider range of financial situations. No matter how high gold prices rise, investors can rely on fractional coins or bars to fetch gold at 1/10th, 1/20th, or even 1/40th of the spot price. This provides novice or budget-conscious investors with a cost-effective way to diversify their portfolios. For many people, fractional gold represents one of the most financially sound entry points into the world of precious metals.
Flexibility
High liquidity is a hallmark of gold assets because of this shiny metal’s universal recognition and high demand. Fractional gold bars and coins take this flexibility even further as their smaller sizes make for quicker and simpler exchanges. In general, the less money involved in a trade, the easier it is to find a buyer. Plus, investors have more wiggle room when deciding how much of their gold to convert into cash. In turn, this provides investors with greater control over their financial needs and allows them to adapt to changing circumstances more easily.
High Purity
The vast majority of fractional gold coins and bars boast a high purity rating of 99%, maximizing their store of value. These high fineness standards are owed to the strict requirements of government mints which, in turn, set a high bar for their private counterparts. A high purity rating also boosts the liquidity of fractional gold assets as it’s easier to determine their value. Investors don’t have to worry about numismatic value which often requires expert evaluations.
Ease of Storage
Storage is a serious concern for precious metals investors looking to safeguard their wealth from theft, damage, or loss. The smaller size of fractional gold coins and bars lends itself to more convenient storage, providing convenience and peace of mind for investors. In addition, these nontraditional sizes of physical gold are much easier to move around and rearrange whether investors need to relocate their investments or liquidate some of their assets.
Bartering Compatibility
Fractional gold assets are ideal candidates for bartering. Their smaller denominations make for easy divisibility which is essential for standard day-to-day purchases. The sheer value of standard-sized gold assets, on the other hand, would be too impractical for trading most products or services. The portable size of fractional coins or bars is also advantageous in a bartering scenario where transportability is essential. The universal recognition and high demand for gold assets would extend to fractional denominations too.
Considerations of Fractional Gold
High Premiums
Fractional gold might have a lower gross cost when compared to standard-sized assets, but these smaller denominations can come with higher dealer premiums. For example, you could incur a higher total premium when purchasing 10 different 1/10 oz gold coins rather than buying a single 1 oz coin. That’s because a premium is applied to each precious metal asset. These higher premiums can eat into potential returns, especially in the short term.
Reporting Requirements
As mentioned before, fractional gold bars or coins tend to come in bullion form. Unfortunately, the government requires investors to report these investments. You typically have to fill out a 1099 tax form and submit your social security number. This is bad news for the large percentage of investors who seek out precious metals for increased privacy and anonymity. If you fall into this camp, you’re better off considering rare coins, most of which don’t come with reporting requirements.
IRA Eligibility
The IRS allows investors to put tax-advantaged dollars toward physical gold assets through a precious metals IRA. However, it places strict limitations on the types of physical gold investors can put into this retirement account. Although some fractional gold coins and bars are eligible precious metals for an IRA, many smaller denominations don’t meet the stringent purity, weight, or type requirements. This opens up investors to high capital gains taxes when it comes time to sell their fractional gold assets.
Limited Options
Although fractional gold bars and coins are growing in popularity, they still represent a small sliver of the broad spectrum of precious metals assets. Investors who limit themselves to these specific sizes are severely restricting their portfolio diversity which is important to have even within the context of precious metals.
Is fractional gold a good investment?
In the right circumstances, fractional gold can be a smart investment. Fractional gold coins and bars represent an accessible way to diversify your portfolio to hedge against inflation and protect your wealth. However, there are some investment contexts in which standard-sized gold assets would be ideal.
That’s why it’s always important to weigh the merit of an investment against your unique investment circumstances. If you’re interested in learning more about how fractional gold sizes up to your goals and budget, please contact one of our Precious Metals Advisors. You can call toll-free at 1-888-812-9892 or use our live chat function.