What is Liquidity and Why Is It Important?

 

You own something of value, and you want to sell it. How difficult will it be for you to find a willing buyer? 

There are really two questions here.

First, at what price will you be able to sell? In a free market economy, virtually any tangible good can be sold to someone, somewhere. When you’re a seller, your primary concern will likely be receiving what you consider to be “fair value.” Is that something you can be reasonably sure of getting, or might you wind up disappointed?

Second, ease of selling. Can you rest assured that, when you sell, there will be demand that’s robust enough for you to complete the sale quickly and easily?

Put the two together, and you have liquidity, which is especially important when it comes to gold and silver coins.

The nice thing about the market for bullion coins is that it is well-defined. They trade more like stocks — which are priced on a daily, ongoing basis — than they do like collectibles such as fine art, classic cars or baseball cards. 

Collectibles are worth whatever someone will pay for them. Those prices can fluctuate wildly, and demand can sometimes completely dry up, which means that they tend to have poor liquidity. One man’s treasure can be another’s trash.

Not so with gold and silver coins. Their value is linked to a price quote, known as spot, which is updated daily and is accessible to buyers and sellers at all times. 

Spot, expressed as the price per ounce of precious metal, serves to put a floor under trades. When you want to sell a coin, you should be able to receive the cash equivalent of spot, less whatever transaction fee the dealer charges.

Nevertheless, there are some caveats, because not all coins are created equal.

Recognition matters. Legal-tender, government-minted coins like the American Eagle and Canadian Maple Leaf are widely recognized. You can walk into a coin shop most anywhere in the world and sell them, or arrange a private party sale, with relative ease. However, less popular coins from mints like those of South Africa or China may be harder to move.

Then there are rounds. These coins issued by private mints contain the same weight of precious metal as their government-stamped counterparts, and they can be a cost-effective way to accumulate gold and silver, since they are usually cheaper. However, there are differences in ounce-quality. Rounds do not have the same global recognition. There will not be as comprehensive of a buyer’s market.

This is especially true of commemoratives, i.e. gold or silver coins issued to commemorate some specific event, like an Olympic Games. These should generally be avoided. They are often minted in “limited-edition” runs, and touted in expensive ad campaigns, so that vendors can charge a higher premium because of their perceived “scarcity.” This makes them more of a collectible. Buyers who want them are creating collections of one kind or another, while the generic buyers who only want an ounce of metal are seldom interested in paying the premium such coins carry. Harder to sell, in other words.

Common or generic rounds — i.e those minted continually in a standard format — are much easier to sell. Again, if you go into a coin shop intending to sell a round, the owner may or may not want it, whereas he would always welcome an Eagle or Leaf.

Thus government-minted coins are the most liquid. Moreover, they are legal tender. They are real money. In an economic crisis, liquidity is king. You will always be able to swap your Eagles for goods. That may not work with rounds.

And in a personal crisis, where you need cash in a hurry, the buyer may hesitate with a round, or offer you less than you believe it to be worth. Your market choices may be more limited.

So rounds, especially silver, can be a good buy. But if you have any concerns, make sure that the vendor with whom you deal has a solid buyback policy. You know where you can always go to sell, and that you will get a fair price. GoldSilver takes pride in offering this as one of its services. And that’s yet another element of liquidity.

Liquidity, in the fullest sense, does matter.