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This article discusses the use of the Precious Metal gold as an investment. ) Gold Bar s. Valued at $225,000 each (January 2006).]] GOLD AS A STORE OF WEALTH s.]] For over four thousand years Gold has been regarded as a form of Money and store of Wealth . The use of gold superseded alternatives for a number of reasons including its rarity, luminosity, character (weight, softness), malleability, Fungibility and resistance to tarnish. Since the collapse of the Gold Standard , gold has largely lost its role as a form of Currency , but is still considered by many, especially by Central Banks , as a Store Of Value and a Safe Haven in times of crisis. Gold and other precious metals are unique Asset s in that they are tangible (i.e. physical, real) and Liquid (i.e. easily traded), unlike Real Estate which is real but not liquid, or company Shares and Bond s which are liquid but not real (i.e. a share certificate is just paper). Other traders and investors see gold as nothing more than just another Commodity , such as Copper or Lead , and treat it as such. TYPES OF GOLD INVESTOR Modern day gold Investors maybe either one of, or a combination of, the following: ;Asset allocator: Traditional asset allocation strategists used to recommend a 5% to 10% exposure to gold was sensible on the grounds of Diversification . Although the inclusion of gold in portfolios has largely been abandoned since the 1980s, it is once again being considered by asset allocators. ;Cacheur: Physical gold can be Anonymous , if the bullion has no Serial Number s or its ownership is not recorded anywhere. Cacheurs seek to hide part of their wealth from their Wives , family, Tax Authorities , creditors, Extortionist s, Kidnap pers, Blackmail ers, Police , invaders or others. The density of gold allows them to store a large value in a very small space, without fear of depreciation or erosion over a long period of time. A metric tonne of gold (1,000 kg) would be equivalent to a Cube of side 37.27 Cm (1 Ft 2⅔ In ), or roughly the size of a basketball. This small cube would contain 32,150 Troy Ounce s, and be worth about $21,000,000 (late April 2006). ;Currency speculator: Since the main gold market is priced in U.S. Dollars , speculators who believe the dollar will decline may buy gold. They think that if the Dollar declines, the gold price will remain constant in other currencies, thus rising in terms of the U.S. dollar. Gold may also be bought if they feel that a different currency will decline, since they expect the dollar price to be stable, but the foreign currency price to rise. Many currency traders treat gold as the fifth World Currency , after the U.S. dollar, European Euro , Japanese Yen and British Pound Sterling . ; or Armageddon , and believe that by holding gold they will Survive and prosper. s are a popular way to invest in gold because their gold content is exactly one Troy Ounce each.]] ;Hoarder: Some investors respect gold as a long-term store of value, and seek no profit, other than to maintain their Purchasing Power . By buying gold and hanging on for the long term, they believe they can keep their wealth intact. ;Inflation hedger: For centuries gold has remained a Store Of Value . It has performed this function best in times of high Inflation . Investors thus buy gold to protect themselves against a rise in inflation and a decline in the value of money, particularly paper money, or Fiat Currency . ;, in preference to fiat currency, for reasons such as lack of trust in Fractional-reserve Banking or government Monetary Policy . ;Portfolio hedger: Similar to asset allocators, except the purpose of the investment is as an Insurance against unforeseen calamities which may affect the price of other investments negatively. Portfolios that contain gold are better able to withstand market surprises than those that do not. Some recent independent studies have suggested that traditional diversifiers, such as bonds, property and Hedge Fund s, often fail to stand up to market stress and may sell off with equities in times of uncertainty. Even a small allocation of gold to a portfolio significantly improves its performance during unstable periods. The investor believes that certain events, if they occur (e.g. War or economic crisis), may have a negative influence on the value of his other investments, but the opposite effect on the value of his gold. ; are affecting the demand for gold, or believe they have detected a Market Trend showing them the future price direction. GOLD PRICE The above chart represents the London Gold Fixing (a.m.) in three currencies over a five year period. The following table sets out the gold price versus various investments and key statistics: FACTORS INFLUENCING THE GOLD PRICE Between 1945 and 1970 the spot price of gold was set by the US Treasury or UK Exchequer. At that time an ounce of gold was represented by fixed number of Dollars or Pounds.
The usual benchmark for the price of gold is known as the London Fixing . This is done at a twice-daily meeting of a committee consisting of five representatives from bullion-trading firms. The meeting was chaired from its inception in 1919 until 2004 by the representative from N M Rothschild & Sons . In May of that year, Rothschild announced its intention to withdraw from the committee, and was replaced by Barclays Bank , and the chairmanship is now rotated annually. The other four representatives are the successor firms who have acquired the original London bullion dealers in the intervening years. In addition to the gold fix, there is active gold trading based on intra-day Spot Price . These are derived from multiple gold-trading markets around the world as they open and close throughout the day. Today, like all investments, and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, since almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. If, for example, the gold price were $100,000 an ounce, queues would form outside bullion dealers as people tried to sell their wedding rings. About one fifth of all gold ever produced sits in Official Gold Reserves at various Central Banks , to be used only in a last resort in case of a national crisis. Given the huge quantity of above ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production or gold jewelry demand. Central banks and the . Other than Russia, these are not viewed as significant central banks, but any move by Japan, China or South Korea to do the same would be seen as significant. Currently the USA has 75% of its foreign reserves in gold, whereas China holds approximately 1% in gold. 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 {Link without Title} . In early 2006, China, who only holds 1.2% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Many bulls took this as a thinly veiled signal that gold would play a larger role in China's reserves, which they hope will push up the price of gold. It would however be impossible for China to increase its gold reserves by anything other than a small percentage, since there is simply insufficient gold available in the market. Inflation fears have also been influential in the past. Inflation is once again rising. The October 2005 consumer price index level of 199.2 (1982-84=100) was 4.3 percent higher than in October 2004. During the first ten months of 2005, the CPI-U rose at a 4.9 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 3.3 percent for all of 2004. 1923-24: A woman in Germany feeds her tiled stove with money. The money is worth less than firewood.]] . Photo courtesy of National Bank of Serbia.]] ;Sentiment: It used to be said that ''"Gold is the world's frightened bunny"''. Whenever crisis threatened, the demand for physical gold increased. ;Bank failures: When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around the paper dollars issued by their bank rather than the somewhat heavier and less divisible Gold Coin s. If people feared their bank would fail, it may create a Bank Run . This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by American citizens. ;Inflation: Most paper currencies which ever existed have been inflated out of existence. Even the very few which have survived a hundred years or more, have seen almost all of their value eroded by the printing of paper money, or the inflation of the money supply. Rising prices, known as Inflation , are a symptom of the inflation of the money supply. In times when inflation is high, or is expected to be high, because it is rising, people seek protection through holding real assets rather than Fiat Currency , which can be printed ad infinitum. History is littered with examples of currencies which have collapsed in Hyperinflation . Gold, which is a real asset, can never be printed by any government, nor is it a claim against any creditor. The demand for gold rises in inflationary times, pushing up the gold price. ;War, invasion, looting: In times of national crisis, people fear that their assets may be seized, and the currency may become worthless. They see gold as a solid asset which will always buy bread or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises. ;Production: According to the World Gold Council , annual gold production over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes. ;Demand: About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. For the last few years, the official sector sales of around 500 tonnes have been taken up by retail investors and gold funds. ;Supply and Demand: Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and available for sale at a price. However, supply and demand does play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold Exchange-traded Fund , but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%. METHODS OF INVESTING IN GOLD Investment in gold can be done directly through ownership, or indirectly through certificates, accounts, shares, futures etc. However, gold's benefit as a secure asset may only be truly realised when directly owned and stored in bullion or coins. Most investors would not recommend storing gold oneself (e.g. in one's home or Buried In The Garden ) but to use a bank or dealer. Other than storing gold in one's own Safe Deposit Box at a bank, gold can also be placed in allocated (also known as non-fungible), or unallocated (fungible or pooled) storage with a bank or dealer. In the unfortunate case of the latter going bankrupt, the client will be unable to claim the gold and would become a general creditor, whereas gold held in allocated storage should be returned to the client in full. However even with gold held in allocated storage, many gold bugs would still choose their storage provider carefully, making sure of high Net Worth , with some preferring an Offshore Bank or storage facility. s with Krugerrand s in the background.]] Bullion The most traditional way of investing in gold is by buying bullion Gold Bar s. In some countries, like Switzerland and Liechtenstein, these can easily be bought or sold over the counter of the major banks. Bars are available in various sizes. In Europe these would typically be in 12.5kg or 1kg bars (1kg = 32.15072 Troy ounces), although many other weights exist, such as the Tael , the 10oz or 1oz bar. Some European banks, particularly in Austria , Liechtenstein , and Switzerland buy and sell gold bars and coins " Over The Counter ". Alternatively, there are bullion dealers which provide the same service. The World Gold Council provide a directory of Gold Bullion Coin and "small bar" (less than 1kg) dealers by country {Link without Title} . s and a Krugerrand]] Coins Buying Gold Coin s is a popular way of holding gold. Typically Bullion Coin s are priced only, or mainly according to their weight, with little or no premium above the gold price. Amongst the most popular bullion gold coins are the South African Krugerrand , the Canadian Gold Maple Leaf , and the Australian Gold Nugget . All these coins are popular because they contain exactly one troy ounce of gold. Other popular one ounce bullion coins include the American Gold Eagle , the Chinese Panda , and the Austrian Philharmonic . Gold coins which are used as bullion coins include the British Gold Sovereign , and the Swiss Vreneli , but these are much lighter than one ounce, making it difficult for an inexperienced person to know their value. Again the large Swiss and Liechtenstein banks will buy and sell these coins over the counter. Also available is the Gold Dinar which has Islamic significance. Many bullion coin dealers can be found around the world by a simple Internet search. Gold certificates A certificate of ownership can be held by gold investors instead of storing the actual gold bullion. Gold Certificate s allow investors to buy and sell the security without the hassles associated with the transfer of actual physical gold. The Perth Mint Certificate Program (PMCP) is the only government guaranteed gold certificate program in the world. Some argue that it is not the same as owning the real thing, as a certificate is just a piece of paper, especially in a war, crisis, or credit collapse. Gold accounts Most Swiss Bank s offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Unlike physical gold, the customer does not own the actual metal, but rather has a claim against the bank for a certain quantity of metal. Digital Gold Currency accounts, such as E-gold or GoldMoney , work on a similar principle. Also available are BullionVault , who act as an internet bullion exchange and gold account provider. Gold accounts are backed through unallocated or allocated gold storage. Exchange-traded funds Gold Exchange-traded Fund s (or ETFs) are traded on the major stock exchanges including London, New York and Sydney. The first gold ETF, namely Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange by ETF Securities , and originally represented exactly one-tenth of an ounce of gold. Due to costs, the amount of gold in each certificate is now slightly less. They are fully backed by gold which is both deposited and insured. The gold can be withdrawn, subject to a minimum size of 100,000 shares. Gold Bullion Securities is two‐thirds owned by the World Gold Council . In April 2006, Exchange Traded Gold (under ticker symbols "GOLD", "GBS", "GBL", and "GLD") and COMEX Gold Trust by IShares (under ticker symbol "IAU") held 488 tonnes of gold in total [http://www.ishares.com/fund_info/detail.jhtml;jsessionid=WLCJ4A0MKQ5MIRJUMRFRBGSFGQ0BYD50?symbol=IAU . ETFs represent a quick and easy way for an investor to gain exposure to the gold price, without the hassle of storing physical bars. Typically a small commission of 0.2% is charged for trading in gold ETFs 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. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars. Gold shares See Also: :Category:Gold mining companies These do not represent gold at all, but rather are and Dividend Yield does the company have now and in the following years? Are the mines subject to political or economic risks? Does the company use Hedging ?'' Instead of personally selecting individual shares, some investors prefer spreading their risk by investing in precious metal mining Mutual Fund s, such as Merrill Lynch 's Gold & General Fund {Link without Title} . Unlike gold bullion, which is regarded as a safe haven asset, gold shares are regarded as high risk and extremely volatile. This 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 actually represents a 20% increase in the mine's profitability, and potentially a 20% increase in the share price. Conversely, a 10% fall in the gold price to $540 will decrease that margin to $240, which actually represents a 20% fall in the mine's profitability, and potentially a 20% decrease in the share price. The amplification of gold mining profits during periods of rising prices can cause a Gold Rush . In order to reduce this volatility many gold mining companies Hedge the gold price up to 18 months in advance. This provides the mining company and investor with less exposure to short term gold price fluctuations, but reduces potential returns when the gold price is rising. The AMEX Gold BUGS Index (ticker symbol "HUI") is comprised of the largest unhedged gold stocks listed on AMEX (BUGS - Basket of Unhedged Gold Stocks). As of 2004, the two largest stocks listed in the index were Newmont Mining Corporation and Gold Fields {Link without Title} . Unhedged gold stocks, AMEX Gold BUGS Index ("HUI"), have outperformed general gold mining stocks, represented by the Philadelphia Gold and Silver Index ("XAU"), over recent years {Link without Title} . Spread betting Firms such as Cantor Index and IG Index , both from the UK offer the ability to take a bet on the price of gold through what is known as a Spread Bet . Say the price of December gold was quoted at $475.10 to $476.10 per troy ounce. An investor who thought the price would go down would "sell" at $475.10. The minimum bet is $2 per point, (i.e. equivalent to 200 ounces). If the price of gold finished at $480.10 when the seller closed his bet, the loss would be 500 points multiplied by the bet of $2 making a loss of $1000 in total. No commissions or taxes are levied in the UK on spread betting. Derivatives Derivative s, such as gold Futures and Option s, currently trade on various exchanges around the world. In the U.S., gold futures are primarily traded on COMEX (Commodity Exchange) which is a subsidiary of the New York Mercantile Exchange . Speculation about the future price of gold and other commodities takes place at COMEX. INVESTMENT STRATEGIES Fundamental analysis Investors may base their investment decisions on Fundamental Analysis . These investors analyse the Macroeconomic situation, which includes international Economic Indicator s, such as GDP growth rates, Inflation , Interest Rate s, Productivity , and energy prices. They would also analyse the total global gold supply versus demand. Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes {Link without Title} . Technical analysis Many investors base their investment decisions on various types of Technical Analysis . Typically this involves looking at past price patterns and Market Trends {Link without Title} . This might include any of the following strategies: ;Charting: In Charting price patterns are used to represent buy or sell indicators, usually because a similar pattern was seen before. The criticism is that charts are open to varying interpretations, and it is often only possible to see the pattern after the price move has occurred. ;Buy low, sell high: The investor believes the price will revert to a previous level, thus he will buy after a fall and sell after a rise. The assumption is thus that the present price is wrong, and the previous price must have been the right one. ;Buy on breakout: The investor looks for a previous price peak or summit, from which the gold price subsequently declined. This price, is known as a ''resistance point'', and the assumption is that it represents a price at which more sellers than buyers appear. The more times the gold price reaches the resistance level, and the more time it spends there, the stronger the resistance is thought to be. When finally the price breaks-out to a higher level than the resistance point, it is assumed that there are no sellers left, and that the price can only rise. The previous resistance level is assumed to become a support level, below which the gold price will not fall. ;Momentum trading: The assumption is that the price trend is likely to continue in the same direction as the recent days, weeks, months, or years. However in order to determine how likely it is that the trend will continue, the investor will employ a variety of techniques to determine the strength of the existing trend. For example, the investor may build a relative strength indicator by multiplying recent price changes by volume, and possibly giving more weight to recent price changes than older ones. Moving averages may be constructed, which would have given accurate buy and sell signals in the past (e.g. "buy when the 45 day moving average turns up, sell when it turns down"). Multiple moving averages may be used (e.g. "buy when the 20 day moving average moves above the 50 day moving average") ;Dow/gold ratio: Investors using this strategy try to predict the future gold price by tracking the ratio between the Dow Jones 30 and the gold price {Link without Title} . The ratio has fluctuated from a low of 1.0 in 1980 (i.e. the Dow and gold price were the same) to a high of 43.7 in 1999 (i.e. the Dow was 43.7 times the gold price). Option writing Some investors believe that gold is the perfect investment for option strategies, since unlike most other securities, or even currencies, there is no possibility of ''. Typically the Strike Price will be below the Spot Price . The investor receives a premium for writing the option. If the gold price has fallen below the strike price at maturity, he will acquire the gold at the strike price. Since he will have previously received the Option Premium , his actual acquisition cost will be below the strike price. By doing so, the investor is aiming to acquire gold cheaper than buying it directly. Whether he successfully acquires the gold or not, he still keeps the premium. Conversely, an investor who wishes to dispose of gold at a price higher than the spot price, may consider ''selling an out of the money call option''. By doing so he hopes to sell at the higher strike price, but whether successful or not, he still keeps the option premium received. Using leverage Bullish investors may choose to Leverage their position by borrowing money against their existing gold assets and then purchasing more gold on account with the loaned funds. In order to keep the cost of Debt to a minimum, these individuals would normally seek a Loan in the currency offering the lowest Interest Rate , which as of April 2006 was the Japanese Yen . Leverage is also an integral part of buying gold Derivatives . Leverage may increase investment gains but also increases risk, as if the gold price decreases the investor may be subject to a Margin Call . GOLD'S VALUE VERSUS MONEY SUPPLY .]] Historically increases in the supply of paper money or Fiat Currency through increased Money Supply would cause the demand for gold to increase. There was a time when gold was money and vice versa. If citizens felt that there may be insufficient gold to cover the paper money in circulation, they would queue up at the bank to change their paper currency back into gold. However, since the Gold Standard was ended on August 15, 1971, governments have been free to print as much money as they choose, without fear that their populations will come knocking on the Central Bank's door demanding to change their paper money back into gold. In January 1959 US M3 money supply was $288.8 billion and the Official Gold Reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces [http://www.gold.org/value/stats/statistics/gold_reserve/index.html (there are 32,150.7 troy ounces in a tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the theoretical price should then have been $518 per ounce, the actual price, as fixed under the gold standard was only $35 an ounce. By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces {Link without Title} . This means that today, in 2005, there are $37,831 in circulation for every troy ounce of gold held by the United States. However, this increase of 75 times in the ratio of central bank gold holdings to debt does not allow for the fact that the gold standard was abandoned in 1971 and gold holdings have been deliberately and considerably reduced. Another far less dramatic way of looking at the same figures is this: In 1959 US government debt valued in gold was 8 billion Troy ounces, in 2005 US government debt was 20 billion oz gold - an increase of only 2.5 times. The above numbers show the falling influence of gold in the monetary system of the world today. Gold Bug s believe, or even hope, that one day gold's importance will return as the printing of paper money gets out of control and we end in a hyper-inflationary fiat money collapse. They sometimes cite the huge U.S. Government Debt , Budget Deficit and Trade Deficit s as additional evidence that things are getting out of control. For example, in 1959 US Government debt was $290,797,771,717 ($290 billion), whereas by February 2006 it had reached $8,205,376,724,587 ($8.2 trillion) The U.S. budget deficits are the largest in history and according to the U.S. Government's own published plans, the budget will not be balanced in the foreseeable future [http://www.fms.treas.gov/bulletin/index.html . LATEST US M3 NUMBERS According to the last published data of 16 March 2006 , M3 was $10,336.3 billion. One year earlier, on 14 March 2005 , M3 was $9,550.5 billion. M3 was thus growing at an annual rate of over 8.22%. The Federal Reserve announced that with effect from 23 March 2006 it will no longer publish M3 data. It remains to be seen whether this will be seen as a cover-up for monetary expansion. Central Banks may see this as a reason to limit further increases in their reserves of dollars, and thus alternatives such as gold or the euro might be considered. GOLD'S VALUE VERSUS GLOBAL STOCK MARKETS In 2001, it was estimated that all the gold ever mined totalled 145,000 tonnes As one metric tonne equals 1,000 kilograms (or 32,150 troy ounces), this equated to a value of $3 trillion in April 2006 [http://www.lbma.org.uk/statistics_current.htm . For comparison, the global Market Capitalization for all Stock Market s was $43.6 trillion in March 2006 [http://www.nyse.com/Frameset.html?nyseref=http%3A//www.google.co.uk/search%3Fhl%3Den%26q%3Dglobal+stock+market+capitalization%26meta%3D%26btnG%3DGoogle+Search&displayPage=/marketinfo/1022963613722.html]. BULLS VERSUS BEARS Many argue that gold's role in the world's monetary system has ended, and that it will never again represent the has ended and a Bull Market has returned [http://www.ameinfo.com/75511.html . TAXATION 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 is free of VAT . Silver , and other precious metals and commodities, do not have the same allowance. Other taxes such as Capital Gains Tax may still apply for individuals, according to their jurisdiction {Link without Title} . There is no capital gains tax in Switzerland. REFERENCES SEE ALSO EXTERNAL LINKS
Live gold spot price charts
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