Your Guide to Gold

The manual for every gold investor

Your Guide to Gold | Sprout Money

Table of Contents

1.

Introduction

2.

Gold

3.

Physical gold

4.

Related investment vehicles

5.

Gold funds

6.

Gold mining stocks

7.

Gold derivatives

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8.

Conclusion

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Your Guide to Gold | Sprout Money

1.

Introduction

Gold. The term shows up in the media more and more each day. Not in
jewelry magazines, but in the financial press. Probably the same media is
(partly) responsible for your knowledge about gold. Whats more, you most
likely found this report through the media or the Internet. Of course its
possible that you came across this information through your network, but
then they probably found their information through these channels.
It doesnt really matter how you found Sprout Money, one thing is clear:
gold is getting more popular by the minute and is attracting the attention of
a lot of people, with good reason. The price of the precious yellow metal is
on the rise now for more than a decade, an impressive unmatched
performance. Real estate, bonds, stocks... nothing can touch gold.
But we are already going to confront you with a thesis, here on page 3. Its
not the price of gold that is increasing; its golds buying power. The value of
everything else is diminishing in terms of gold. The reason for this is simply
because gold is a currency (money). Gold has been a currency for
thousands of years. Its only been since the 70s that gold is no longer
considered an official currency. Even better, gold was decoupled from its
monetary status. And thats when things really started to go wrong...
Thats a subject well tackle later in this report. What we are trying to get
across at this point is that gold is not just gold. Its a lot more than that and a
lot more than you probably considered it to be. This is why we put together
this manual as an introduction course for investors new to gold.
We will give you a clear explanation about gold. What it really is and why
you need to buy it. Moreover, we will give you an overview of the options to
invest in gold. At the end of the report, we will give you our vision about the
role and evolution of gold in the financial system.
We hope to give you some guidance and a strong start with this Guide to
Gold. Of course we wish you a lot of success with your future gold
investments!
Our kind golden regards,
Sprout Money

Your Guide to Gold | Sprout Money

2.

Gold

What is gold?

We probably dont need to explain to you what physical gold looks like. Its a
metal with a yellow color, which is mainly used in the manufacture and
creation of jewelry and ornaments.
Gold belongs to the same group of precious metals to which silver,
platinum, and palladium also belong. The valuable metal wears the
precious tag because it is not very abundant in our earths crust. In other
words, gold is scarce.
Gold is an element with the symbol Au and is ranked with atomic number 79
on Mendeleevs Periodic Table. It is a bright yellow transition metal that
doesnt rust. Moreover, consumption of gold is harmless to the human body
and is sometimes used (in small amounts) for luxury drinks or foods.
Gold is also a very good conductor for electrical and thermal energy and
has relatively high density. It weighs almost twice as much as lead and is
about 19 times heavier than water. Next time you see someone swiftly pick
up a solid bar of gold in the movies, it should weigh about 30 pounds...
If we dig a little bit more and deeper into the history of gold well find out that
gold is older than our dear planet! Gold has been present on earth since the
beginning, but wasnt formed on earth because it can only result from
thermo-nuclear processes that take place inside the core of stars that
contain hydrogen.
In other words, gold is an alien metal!

Your Guide to Gold | Sprout Money

Why invest in gold?

Those were some little nuggets about gold. What mainly interests us,
however, is the monetary aspect of gold. Humans have regarded gold as
money for over thousands of years. The theories about why we historically
settled on gold as currency are very diverse.
What we do know by now is that gold has certain characteristics that make
it very useful as a medium for exchange, the primary goal of money. Gold
holds its value very well, small amounts of gold can be very valuable and it
is relatively insensitive to inflation in our financial system.
That last aspect is getting increased attention in recent history. Gold as a
physical currency does also have its disadvantages. Large quantities are
difficult to handle and having a lot of gold can be risky.
As a solution an innovation came to life with regards to gold as currency:
the gold standard. Paper money that was linked to the amount of gold that
was out there or in the possession of the government. This was a more
efficient way of trading without the loss of value.
There is, however, a more important disadvantage. The production of gold
grows yearly by 2 percent, which implies an increase in the amount of
money in the system by 2 percent. Already, that is the most important
limitation of a financial system based on gold. If society grows faster than 2
percent, the financial system is impeding its growth. This also happened
during times of war; gold was holding back the necessary growth.
In the past, governments switched regularly to a monetary system that had
nothing to do with gold, a paper or fiduciary monetary system. This way, the
amount of money could keep pace with the need. But its clear that this
leads to enormous excess sooner or later. Because of this, most historical
paper monetary systems only held up for a hundred years at most, after
which money would be coupled with gold again.
Today, our society is functioning based on a paper monetary system
globally, unrelated to gold. This system has been in operation since 1971,
the year in which president Nixon decoupled the US dollar from gold to
finance the war in Vietnam. The dollar was made the world reserve
currency, in which commodities would be traded, after the Second World
War.
The world has been running on a fiduciary monetary system for more than
40 years now, and you can guess the rest: its already becoming unstable.
Since 2000, the global monetary system is being crushed by increasingly
huge debts. Debts that were created out of nothing based on the paper
monetary system we have now.

Your Guide to Gold | Sprout Money

The central banks, the keepers of our monetary system, are still creating
paper money in excess. This is because of the lack of discipline that
comes from using a gold standard. Put plainly: the problems are being
fought with the basis of the problem. Of course this cannot last, and our
current fiduciary monetary system is in its last phase. This is the last step
before we change back to a monetary system that is coupled with gold.
How long the current fiduciary monetary system that is based on the dollar
can last from today onward, is hard to tell. It can stay up on its feet for a few
more decades possibly, but it can also be over tomorrow if global
governments decide so. The fact of the matter is: the transition is always
accompanied by a mass destruction of buying power. This is where gold
comes in the picture. This is the answer to the question: Why gold? For the
benefit of your buying power during the transition.

The above cartoon illustrates where the new gold system will be born: in the
East. In other words, the downfall of the fiduciary monetary system and the
rebirth of gold will also mean the demise of the West and the ascent of the
East. A global transition of power.

How to invest in gold?

So you have to have gold to protect the buying power of your capital.
Especially now, because we are in the last phase of our current fiduciary
monetary system. That is also the reason why the price of gold has gone
up. Gold itself does not go up in value; it is the depreciation of the value of
our fiduciary money that you are seeing. Gold will always be gold. Its as
simple as that.
You can buy gold in many forms. In the coming chapters we will take a
closer look at most of the options for buying gold. Its up for discussion how
much of your portfolio you should invest in gold. There is no golden rule.
Some say a small percentage, others your full investment portfolio.
Our opinion is that about 10 to 20 percent of your complete capital (real
estate, bonds, stocks, cashB) is a good spread. This percentage is
dependent on your personal investment profile. A good rule of thumb: buy
as much gold as you can.

Your Guide to Gold | Sprout Money

3.

Physical gold

Gold bullion

Physical coins or bars are the purest form of gold. The personal possession
of gold has negligible counterparty risk. An important aspect with regards to
owning gold. Put differently, through owning physical gold personally you
are keeping a part of your capital safe, outside of the financial fiduciary
system.
Physical gold is in that respect the ultimate safe haven and should
consequently be the basis for every gold portfolio. On top of that, other
types of gold investments (gold mining stocks, gold fundsB) can provide
additional protection.
Gold bars are available in different weights, going from 1 gram to 1 kilogram
for the investor audience. The 400 troy ounce bars (12.5 kilograms) are
mainly meant for institutional investors and central banks. The biggest gold
bar ever produced weighs 250 kilograms or 550 pounds.
Gold coins exist in many forms, mostly marked with the country where the
physical gold was minted. The most popular gold coins are: the South
African Krugerrand, the Canadian Maple Leaf, the American Eagle, the
Austrian Philharmonic, the Australian Gold Nugget and the Chinese Panda.
The coins are made out of 0.999 fine gold, better known as 24 karat gold
and the weight is most often 1 ounce (31.1 grams). Other gold coins may be
a bit different, for example the French Napoleon (6.45 grams, 90% gold).

Numismatic coins

Numismatic coins are older, rarer gold coins. Gold coins that are not minted
anymore today. Next to their normal value in gold, they also have an
additional historical value. The age of the coins can range from the
beginning of the last century all the way to the times of the Roman Empire!

Jewelry

Gold jewelry in its purest form (24 karat) can also be considered as an
investment. Next to their value in gold, rings and other jewelry have of
course artistic value, which can make the price deviate.

Your Guide to Gold | Sprout Money

4.

Related investment vehicles

Gold account

Many banks have gold accounts. With a gold account you can buy gold
that is being kept in the bank vault as physical gold. However, not all gold
accounts are structured in that way. Banks dont really promote this product
though, because the margins are low on gold accounts. Also, there hasnt
been a lot of demand.

Gold certificates

National mints mostly issue gold certificates. The most famous international
gold certificate comes from the Australian Perth Mint. Every certificate
represents an amount of gold that is being kept in the vaults of the issuer.
The amount of gold on a certificate is often, however, not allocated to a
single person, but it is pooled.

Digital gold

With the arrival of the Internet, online gold depots came into existence.
Through an online gold account you can buy and sell gold, but also do
transactions in gold (if the other party also has a digital gold account).
GoldMoney and BullionVault are the most well known.

5.

Gold funds

You can also buy exchange-traded gold products. Exchange-traded

products denote a share of physical gold. Especially ETFs (exchangetraded funds) are gaining popularity in recent years because of their simple
and flexible structure. The biggest gold ETF is the SPDR Gold Shares,
which is also the second largest exchange-traded fund in the world by
market capitalization.
Additionally, there are other products such as closed-end funds (CEF) that
have a fixed number of shares. The nominal value of a CEF is determined
by the market and often differs from the underlying value of the fund. Both
types of funds have their advantages and disadvantages.

Your Guide to Gold | Sprout Money

6.

Gold mining stocks

Gold producers

Another way to gain exposure to gold is through gold mining companies;

mining companies that are mainly focused on retrieving gold. This way, you
are profiting from the gold that is found under ground on one side, but also
from the sale of the new gold.
This is the reason that gold mining stocks are heavily affected by the gold
price. The higher the price of gold, the higher their profits are. The higher
the profits, the higher the value of the gold mining stocks.

The above chart shows that the gold price has gone up 5 fold since 2001.
Gold mining stocks, however, rose with 1200% in the same period if we
look at the Gold Bugs Index (index of gold mining companies). Thats
leverage.
The value of gold mining stocks can diverge vastly from the underlying
assets. Always make sure you are well informed with regards to the buying
and selling of gold mining stocks, one of the biggest reasons we have the
Gold & Silver Report.

Your Guide to Gold | Sprout Money

Gold royalty companies

Next to gold producers, there are also gold royalty companies. They are
piggybacking on the income stream of the gold mining companies as they
claim part of the revenue. This is most often because royalty companies
own the land where the mining activities are taking place or through some
other construction, they claim their stake.
The advantage is that gold royalty companies are not running any mining
risks such as natural disasters, accidents, etc. The valuation can vary a lot
from gold mining stocks, however, which is a disadvantage. Gold royalty
companies are often more expensive. Again, we want to underline that it is
important to get some advice with regards to gold royalty stocks through the
Gold & Silver Report of Sprout Money.

Exploration companies (juniors)

Before mining companies can start with the production of gold, they first
need to find some interesting spots with gold deposits. Exploration
companies do this kind of preparatory work. When these gold prospectors
find a large gold deposit in the earths crust, they can then start the
extraction process or sell the land to a gold producer.
In any case, a find like that is of great value to the stockholders of the
juniors. The most successful junior in recent years is Aurelian Resources,
which found 13.7 million ounces of gold reserves in 2006. The stock
rocketed upward by thousands of percentage points, as you can see in the
graph below.

Of course there is a much larger risk with these kinds of companies. It is an

art in itself to find the right juniors. A lot of factors are important in a
successful analysis. In our Gold & Silver Report, we analyze and research
juniors thoroughly. Never dive head first into these kinds of stocks.
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Your Guide to Gold | Sprout Money

7.

Gold derivatives

Finally, there are gold derivatives. They are contracts that give you the right
or an obligation to do a future transaction in gold. Derivatives are affected
by the gold price, but mostly the expected price of the contract. These
contracts can be futures, options or CFDs (contract for difference).
With these kinds of products, the risk is very high. To give you an example:
80% of all options contracts expire worthless. This is not really going to be
our focus, because it has less to do with gaining exposure to the gold price,
but more with betting on the contract price and short-term expectations.

8.

Conclusion

Gold offers you an anchor for your buying power and a safe haven for your
capital in this last phase of our current monetary system. Smart investors
will do well by transitioning part of their capital into gold and related
investment vehicles, whereby the percentage should be between 10 and 20
percent of your complete portfolio including real estate, bonds, stocks and
cash.
With regards to everything gold-related in your portfolio, a distinction should
be made between physical gold, preferably the well-known coins and bars,
and a good mix of gold mining stocks. You can also still make a distinction
between gold producers, gold royalty companies and juniors. For more
information we would like to refer you to the Gold & Silver Report of Sprout
Money!
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Disclaimer: Your Guide to Gold is published by Sprout Money, part of the Evia Group. Questions and comments can be sent to
info@sproutmoney.net . Copyright 2013 Sprout Money. This publication is only meant as advice. No advice can be taken as
an obligation to buy or sell of any financial product. You are required to invest according to your own financial means. Readers
need to be aware of investment and exchange risks. The results of the past are not a guarantee of future results. Copying or
distributing this information is a criminal offense without our permission!

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Your Guide to Gold | Sprout Money