Gold as an investment

From Wikipedia, the free encyclopedia

Of all the precious metals, gold is the most popular as an

investment.[1] Investors generally buy gold as a hedge or safe
haven against any economic, political, social, or fiat currency
crises (including investment market declines, burgeoning
national debt, currency failure, inflation, war and social
unrest). The gold market is also subject to speculation as Reserves of SDR, forex and gold in
other commodities are, especially through the use of futures 2006
contracts and derivatives. The history of the gold standard,
the role of gold reserves in central banking, gold's low
correlation with other commodity prices, and its pricing in
relation to fiat currencies during the financial crisis of 2007–
2010, suggest that gold has features of being money.[2][3]

Contents
„ 1 Gold price
„ 2 Factors influencing the gold price
„ 2.1 Central banks
„ 2.2 Hedge against financial stress A Good Delivery bar, the standard for
„ 2.3 Jewellery and industrial demand trade in the major international gold
„ 2.4 Short selling
markets.
„ 2.5 War, invasion and national emergency

„ 3 Investment vehicles
„ 3.1 Bars
„ 3.2 Coins
„ 3.3 Exchange-traded products (ETPs)
„ 3.4 Certificates
„ 3.5 Accounts
„ 3.6 Derivatives, CFDs and spread betting
„ 3.7 Mining companies

„ 4 Investment strategies
„ 4.1 Fundamental analysis
„ 4.2 Gold versus stocks
„ 4.3 Technical analysis
„ 4.4 Using leverage

„ 5 Taxation
„ 6 Scams and frauds
„ 7 See also
„ 8 References
„ 9 External links

Gold price
Gold has been used throughout history as money and has been a relative standard for currency
equivalents specific to economic regions or countries. Many European countries implemented gold
standards in the later part of the 19th century until these were dismantled in the financial crises
involving World War I. After World War II, the Bretton Woods system pegged the United States
dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 Nixon Shock,

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when the US unilaterally suspended the direct convertibility of the United States dollar to gold and
made the transition to a fiat currency system. The last currency to be divorced from gold was the
Swiss Franc in 2000.

Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a
twice-daily telephone meeting of representatives from five bullion-trading firms of the London
bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day
spot price, derived from over-the-counter gold-trading markets around the world (code "XAU"). The
following table sets forth the gold price versus various assets and key statistics:

Trade
Gold World
DJIA US Debt Weighted
Year USD/ozt GDP
[4] USD[5] USD bn[7] US dollar
USD tn[6]
Index[8]
1970 37 839 3.3 370
1975 140 852 6.4 533 33.0
1980 590 964 11.8 908 35.7
1985 327 1,547 13.0 1,823 68.2
1990 391 2,634 22.2 3,233 73.2
1995 387 5,117 29.8 4,974 90.3
2000 273 10,787 31.9 5,662 118.6
2005 513 10,718 45.1 8,170 111.6
2010 1,410 11,578 ... 14,025 99.9
1970 to 2010 net change, %
3,792 1,280 ... 3,691 ...
1975 (post US off gold standard) to 2010 net change, %
929 1,259 ... 2,531 ...

In March 2008, the gold price exceeded US$1,000,[9] achieving a nominal high of US$1,004.38. In
real terms, actual value was still well below the US$599 peak in 1981 (equivalent to $1417 in U.S.
2008 dollar value). After the March 2008 spike, gold prices declined to a low of US$712.30 per
ounce in November. Pricing soon resumed on upward momentum by temporarily breaking the
US$1000 barrier again in late February 2009 but regressed moderately later in the quarter.

Later in 2009, the March 2008 intra-day spot price record of US$1,033.90 was broken several times
in October, as the price of gold entered parabolic stages of successively new highs when a spike
reversal to $1226 initiated a retrace of the price to the mid-October levels.

On November 9, 2010, gold closed at a new nominal high of $1421.00 in NYMEX.[10]

Factors influencing the gold price

Today, like most commodities, the price of gold is driven by supply and demand as well as
speculation. However unlike most other commodities, saving and disposal plays a larger role in
affecting its price than its consumption. Most of the gold ever mined still exists in accessible form,
such as bullion and mass-produced jewelry, with little value over its fine weight — and is thus
potentially able to come back onto the gold market for the right price.[11][12] At the end of 2006, it
was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 LT; 174,000 ST).[13]

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This can be represented by a cube with an edge length of 20.2 metres (66 ft).

Given the huge quantity of gold stored above-ground compared to the annual production, the price of
gold is mainly affected by changes in sentiment, rather than changes in annual production.[14]
According to the World Gold Council, annual mine production of gold over the last few years has
been close to 2,500 tonnes.[15] About 2,000 tonnes goes into jewellery or industrial/dental
production, and around 500 tonnes goes to retail investors and exchange traded gold funds.[15]

Central banks

Central banks and the International Monetary Fund play an important role in the gold price. At the
end of 2004 central banks and official organizations held 19 percent of all above-ground gold as
official gold reserves.[16] The ten year Washington Agreement on Gold (WAG), which dates from
September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for
International Settlements and the International Monetary Fund) to less than 500 tonnes a year.[17]
European central banks, such as the Bank of England and Swiss National Bank, were key sellers of
gold over this period.[18] In 2009, this agreement was extended for a further five years, but with a
smaller annual sales limit of 400 tonnes.[19]

Although central banks do not generally announce gold purchases in advance, some, such as Russia,
have expressed interest in growing their gold reserves again as of late 2005.[20] In early 2006, China,
which only holds 1.3% of its reserves in gold,[21] announced that it was looking for ways to improve
the returns on its official reserves. Some bulls hope that this signals that China might reposition more
of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons
of gold which has led to a surge in prices.[22]

Hedge against financial stress

Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency
devaluation. As Joe Foster, portfolio manager of the New York-based Van Eck International Gold
Fund, explained in September 2010:

The currencies of all the major countries, including ours, are under severe pressure
because of massive government deficits. The more money that is pumped into these
economies – the printing of money basically – then the less valuable the currencies
become.[23]

If the return on bonds, equities and real estate is not adequately compensating for risk and inflation
then the demand for gold and other alternative investments such as commodities increases. An
example of this is the period of stagflation that occurred during the 1970s and which led to an
economic bubble forming in precious metals.[24][25]

Jewellery and industrial demand

Jewellery consistently accounts for over two-thirds of annual gold demand. India is the largest
consumer in volume terms, accounting for 27% of demand in 2009, followed by China and the USA.
[26]

Industrial, dentistry and medical uses account for around 12% of gold demand. Gold has high
thermal and electrical conductivity properties, along with a high resistance to corrosion and bacterial
colonization. Jewellery and industrial demand has fluctuated over the past few years due to the

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steady expansion in emerging markets of middle classes aspiring to Western lifestyles, offset by the
financial crisis of 2007–2010.[27]

Short selling

The price of gold is also affected by various well-documented mechanisms of artificial price
suppression, arising from fractional-reserve banking and naked short selling in gold, and particularly
involving the London Bullion Market Association, the United States Federal Reserve System, and
the banks HSBC and JPMorgan Chase.[28][29][30][31] Gold market observers have noted for many
years that the price of gold tends to fall artificially at the start of New York trading.[32]

War, invasion and national emergency

When dollars were fully convertible into gold via the gold standard, both were regarded as money.
However, most people preferred to carry around paper banknotes rather than the somewhat heavier
and less divisible gold coins. If people feared their bank would fail, a bank run might result. This
happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to
impose a national emergency and issue Executive Order 6102 outlawing the ownership of gold by
US citizens.[33] There was only one prosecution under the order, and in that case the order was ruled
invalid by federal judge John M. Woolsey, on the technical grounds that the order was signed by the
President, not the Secretary of the Treasury as required.[34]

In times of war, people fear that their assets may be seized and that the currency may become
worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times
of great uncertainty, particularly when war is feared, the demand for gold rises.[35][36]

Investment vehicles
Bars

The most traditional way of investing in gold is by buying

bullion gold bars. In some countries, like Argentina, Austria,
Liechtenstein and Switzerland, these can easily be bought or
sold at the major banks. Alternatively, there are bullion
dealers that provide the same service. Bars are available in
various sizes. For example in Europe, Good Delivery bars are
approximately 400 troy ounces (12 kg).[37] 1 kilogram (32
ozt) are also popular, although many other weights exist, such
as the 10oz, 1oz, 10 g, 100 g, 1 kg, 1 Tael, and 1 Tola.

Bars generally carry lower price premiums than gold bullion 1 troy ounce (31 g) gold bar with
coins. However larger bars carry an increased risk of forgery certificate
due to their less stringent parameters for appearance. While
bullion coins can be easily weighed and measured against
known values, most bars cannot, and gold buyers often have bars re-assayed. Larger bars also have a
greater volume in which to create a partial forgery using a tungsten-filled cavity, which may not be
revealed by an assay.[38]

Efforts to combat gold bar counterfeiting include kinebars which employ a unique holographic
technology and are manufactured by the Argor-Heraeus refinery in Switzerland.

Coins

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Gold coins are a common way of owning gold. Bullion coins are priced according to their fine
weight, plus a small premium based on supply and demand (as opposed to numismatic gold coins
which are priced mainly by supply and demand based on rarity and condition).

The Krugerrand is the most widely-held gold bullion coin, with 46,000,000 troy ounces (1,400
tonnes) in circulation. Other common gold bullion coins include the Australian Gold Nugget
(Kangaroo), Austrian Philharmoniker (Philharmonic), Austrian 100 Corona, Canadian Gold Maple
Leaf, Chinese Gold Panda, Malaysian Kijang Emas, French Coq d’Or (Golden Rooster), Mexican
Gold 50 Peso, British Sovereign, and American Gold Eagle.

Coins may be purchased from a variety of dealers both large and small. Fake gold coins are not
uncommon, and are usually made of gold-plated lead.

Exchange-traded products (ETPs)

Gold exchange-traded products may include ETFs, ETNs, and CEFs which are traded like shares on
the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"),
was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly
0.1 troy ounces (3.1 g) of gold. As of November 2010, SPDR Gold Shares is the second-largest
exchange-traded fund (ETF) in the world by market capitalization.[39]

Gold ETPs represent an easy way to gain exposure to the gold price, without the inconvenience of
storing physical bars. However exchange-traded gold instruments, even those which hold physical
gold for the benefit of the investor, carry risks beyond those inherent in the precious metal itself. For
example the most popular gold ETP (GLD) has been widely criticized, and even compared with
mortgage-backed securities, due to features of its complex structure.[28][40][41][42][43]

Typically a small commission is charged for trading in gold ETPs and a small annual storage fee is
charged. The annual expenses of the fund such as storage, insurance, and management fees are
charged by selling a small amount of gold represented by each certificate, so the amount of gold in
each certificate will gradually decline over time.

Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end
companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and
UITs.[44] The main differences are that ETFs do not sell directly to investors and they issue their
shares in what are called "Creation Units" (large blocks such as blocks of 50,000 shares). Also, the
Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF's
portfolio. Usually, the Creation Units are split up and re-sold on a secondary market.

ETF shares can be sold in basically two ways. The investors can sell the individual shares to other
investors, or they can sell the Creation Units back to the ETF. In addition, ETFs generally redeem
Creation Units by giving investors the securities that comprise the portfolio instead of cash. Because
of the limited redeemability of ETF shares, ETFs are not considered to be and may not call
themselves mutual funds.[44]

Certificates

Gold certificates allow gold investors to avoid the risks and costs associated with the transfer and
storage of physical bullion (such as theft, large bid-offer spread, and metallurgical assay costs) by
taking on a different set of risks and costs associated with the certificate itself (such as commissions,
storage fees, and various types of credit risk).

Banks may issue gold certificates for gold which is allocated (non-fungible) or unallocated (fungible

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or pooled). Unallocated gold certificates are a form of fractional reserve banking and do not
guarantee an equal exchange for metal in the event of a run on the issuing bank's gold on deposit.[45]
Allocated gold certificates should be correlated with specific numbered bars, although it is difficult
to determine whether a bank is improperly allocating a single bar to more than one party.[46]

The first paper bank notes were gold certificates. They were first issued in the 17th century when
they were used by goldsmiths in England and The Netherlands for customers who kept deposits of
gold bullion in their vault for safe-keeping. Two centuries later, the gold certificates began being
issued in the United States when the US Treasury issued such certificates that could be exchanged
for gold. The United States Government first authorized the use of the gold certificates in 1863. In
the early 1930s the US Government restricted the private gold ownership in the United States and
therefore, the gold certificates stopped circulating as money. Nowadays, gold certificates are still
issued by gold pool programs in Australia and the United States, as well as by banks in Germany and
Switzerland.

Accounts

Many types of gold "accounts" are available. Different accounts impose varying types of
intermediation between the client and their gold. One of the most important differences between
accounts is whether the gold is held on an allocated (non-fungible) or unallocated (fungible) basis.
Another major difference is the strength of the account holder's claim on the gold, in the event that
the account administrator faces gold-denominated liabilities (due to a short or naked short position in
gold for example), asset forfeiture, or bankruptcy.

Many banks offer gold accounts where gold can be instantly bought or sold just like any foreign
currency on a fractional reserve (non-allocated, fungible) basis. Swiss banks offer similar service on
an allocated (non-fungible) basis. Pool accounts, such as those offered by Kitco, facilitate highly
liquid but unallocated claims on gold owned by the company. Digital gold currency systems operate
like pool accounts and additionally allow the direct transfer of fungible gold between members of the
service. BullionVault and Anglo Far-East allow clients to create a bailment on allocated (non-
fungible) gold, which becomes the legal property of the buyer.

Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around
the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are
primarily traded on the New York Commodities Exchange (COMEX) and Euronext.liffe. In India,
gold futures are traded on the National Commodity and Derivatives Exchange (NCDEX) and Multi
Commodity Exchange (MCX).[47]

As of 2009, holders of COMEX gold futures have experienced problems taking delivery of their
metal. Along with chronic delivery delays, some investors have received delivery of bars not
matching their contract in serial number and weight. The delays cannot be easily explained by slow
warehouse movements, as the daily reports of these movements show little activity. Because of these
problems, there are concerns that COMEX may not have the gold inventory to back its existing
warehouse receipts.[48]

Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK, provide
contract for difference (CFD) or spread bets on the price of gold.

Mining companies

These do not represent gold at all, but rather are shares in gold mining companies. If the gold price

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rises, the profits of the gold mining company could be expected to rise and as a result the share price
may rise. However, there are many factors to take into account and it is not always the case that a
share price will rise when the gold price increases. Mines are commercial enterprises and subject to
problems such as flooding, subsidence and structural failure, as well as mismanagement, theft and
corruption. Such factors can lower the share prices of mining companies.

The price of gold bullion is volatile, but unhedged gold shares and funds are regarded as even higher
risk and even more volatile. This additional volatility is due to the inherent leverage in the mining
sector. For example, if you own a share in a gold mine where the costs of production are $300 per
ounce and the price of gold is $600, the mine's profit margin will be $300. A 10% increase in the
gold price to $660 per ounce will push that margin up to $360, which represents a 20% increase in
the mine's profitability, and potentially a 20% increase in the share price. Furthermore, at higher
prices, more ounces of gold become economically viable to mines, enabling companies to add to
their reserves. Conversely, share movements also amplify falls in the gold price. For example, a 10%
fall in the gold price to $540 will decrease that margin to $240, which represents a 20% fall in the
mine's profitability, and potentially a 20% decrease in the share price.

To reduce this volatility, some gold mining companies hedge the gold price up to 18 months in
advance. This provides the mining company and investors with less exposure to short term gold price
fluctuations, but reduces returns when the gold price is rising.

Investment strategies
Fundamental analysis

Investors using fundamental analysis analyze the macroeconomic situation, which includes
international economic indicators, such as GDP growth rates, inflation, interest rates, productivity
and energy prices. They would also analyze the yearly global gold supply versus demand. Over 2005
the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to be
3,754 tonnes, giving a surplus of 105 tonnes.[49] While gold production is unlikely to change in the
near future, supply and demand due to private ownership is highly liquid and subject to rapid
changes. This makes gold very different from almost every other commodity.[11][12] Identifiable
investment demand for gold, which includes gold exchange-traded funds, bars and coins, was up 64
percent in 2008 over the year before.[50]

Gold versus stocks

In the last century, major economic crises (such

as the Great Depression, World War II, the first
and second oil crisis) lowered the Dow/gold
ratio, an indicator of how bad a recession is and
whether the outlook is deteriorating or
improving, to a value well below 4. The ratio fell
on February 18, 2009 to below 8.[50] During
these difficult times, many investors tried to
preserve their assets by investing in precious
metals, most notably gold and silver.

The performance of gold bullion is often

compared to stocks due to their fundamental
differences. Gold is regarded by some as a store Dow/Gold Ratio 1968-2008
of value (without growth) whereas stocks are
regarded as a return on value (i.e., growth from

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anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political
climate with strong property rights and little turmoil. The attached graph shows the value of Dow
Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have
consistently gained value in comparison to gold in part because of the stability of the American
political system.[51] This appreciation has been cyclical with long periods of stock outperformance
followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1
with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the
1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union's invasion of
Afghanistan and the threat of the global expansion of communism. The ratio peaked on January 14,
2000 a value of 41.3 and has fallen sharply since.

On November 30, 2005, Rick Munarriz of The Motley Fool posed the question of which represented
a better investment: a share of Google or an ounce of gold. The specific comparison between these
two very different investments seems to have captured the imagination of many in the investment
community and is serving to crystallize the broader debate.[52][53] At the time of writing, a share of
Google's stock was $405 and an ounce of gold was one day from breaking the $500 barrier, which it
did December 1. On January 4, 2008 23:58 New York Time, it was reported that an ounce of gold
outpaced the share price of Google by 30.77%, with gold closing at $859.19 per ounce and a share of
Google closing at $657 on U.S. market exchanges. On January 24, 2008, the gold price broke the
$900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time
ever on March 13, 2008 amid recession fears in the United States.[54] Google closed 2008 at $307.65
while gold closed the year at $866. Leading into 2010, Google had doubled off that (100%), whereas
gold had risen 40%.

Note that the analysis of log-linear oscillations in the gold price dynamics for 2003–2010 conducted
recently by Askar Akayev's research group has allowed them to forecast a collapse in gold prices in
April – June 2011.[55]

Technical analysis

As with stocks, gold investors may base their investment decision partly on, or solely on, technical
analysis. Typically, this involves analyzing chart patterns, moving averages, market trends and/or the
economic cycle in order to speculate on the future price.

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing
assets and then purchasing gold on account with the loaned funds. Leverage is also an integral part of
buying gold derivatives and unhedged gold mining company shares (see gold mining companies).
Leverage or derivatives may increase investment gains but also increases the corresponding risk of
capital loss if/when the trend reverses.

Taxation
Main article: Taxation of precious metals

Gold maintains a special position in the market with many tax regimes. For example, in the
European Union the trading of recognised gold coins and bullion products are free of VAT. Silver,
and other precious metals or commodities, do not have the same allowance. Other taxes such as
capital gains tax may also apply for individuals depending on their tax residency. U.S. citizens may
be taxed on their gold profits at 15, 23, 28 or 35 percent, depending on the investment vehicle used.
[56]

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USA: Due to section 9006 of the U.S. Patient Protection and Affordable Care Act, starting on
January 1, 2012, IRS tax form 1099 will be required for all purchases of goods and services that
exceed $600 per calendar year. This new reporting requirement will cover precious metals. With
gold at $1200 per ounce, this would make it impossible to sell a typical one-ounce bullion coin
without IRS paperwork. As of July 2010 the bullion industry is fighting the regulation, and
California Representative Dan Lungren has introduced legislation to have the relevant section of the
Act reversed.[57]

Scams and frauds

Gold attracts its fair share of fraudulent activity. Some of the most common to be aware of are:

„ High-yield investment programs - HYIPs are usually just pyramid schemes dressed up with no
real value underneath. Using gold in their prospectus makes them seem more solid and
trustworthy.
„ Advance fee fraud - Various emails circulate on the Internet for buyers or sellers of up to
10,000 metric tonnes of gold. This is more gold than the US Federal Reserve owns. Often
naive middlemen are drafted in as hopeful brokers, and usually mention mythical terms like
'Swiss Procedure' or 'FCO' (Full Corporate Offer). The end-game of these scams is unknown,
but they probably just attempt to extract a small 'validation' sum out of the innocent
buyer/seller from their hope of getting the big deal.[58]
„ Gold dust sellers - This scam persuades an investor there is real gold with a trial quantity, then
eventually delivers brass filings or similar.
„ Counterfeit gold coins.
„ Shares in fraudulent mining companies with no gold reserves, or potential of finding gold,[59]
as per the American saying, attributed to Mark Twain but unsourced, that "A gold mine is a
hole in the ground with a liar on top."[60]
„ Cash for gold - With the rise in the value of gold due to the financial crisis of 2007-2010, there
has been a surge in companies that will buy personal gold in exchange for cash, or sell
investments in gold bullion and coins. Several of these have prolific marketing plans and high
value spokesmen, such as prior vice presidents. Many of these companies are under
investigation for a variety of securities fraud claims, as well as laundering money for terrorist
organizations.[61][62][63][64] Also given that ownership is often not verified, many companies
are considered to be receiving stolen property, and multiple laws are under consideration on
methods to curtail this.[65][66]

See also
„ Full-reserve banking
„ Gold exchange-traded product
„ Peak gold

Rare materials as investments

„ Diamonds as an investment
„ Palladium as an investment
„ Platinum as an investment
„ Silver as an investment

References

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 65. ^ [6]
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External links
„ GoldPrice.org (quick current price)

The History of Gold by Goldcore.com

„ (Gold) kinebars (detailed information on kinebars & gold)

„ Gold as an investment at the Open Directory Project
Retrieved from "http://en.wikipedia.org/wiki/Gold_as_an_investment"
Categories: Gold investments | Investment | Commodities used as an investment | Security

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