Gold: Investment Opportunities

For thousands of years, due to its rarity gold has been valued as a global currency, a commodity, an investment and simply an object of beauty. How rare is gold, well this quote sums it up nicely.

"How rare is gold? If you could gather together all the gold mined in recorded history, melt it down, and pour it into one giant cube, it would measure only about eighteen yards across! That's all the gold owned by every government on earth, plus all the gold in private hands, all the gold in rings, necklaces, chains, and gold art. That's all the gold used in tooth fillings, in electronics, in coins and bars. It's everything that exists above ground now, or since man learned to extract the metal from the earth. All of it can fit into one block the size of a single house. It would weigh about 91,000 tons - less than the amount of steel made around the world in an hour. That's rare." Daniel M. Kehrer

As financial markets developed and expanded during the 1980s and 1990s, gold fell out of fashion for many investors and gold was perceived as an asset of last resort. However, in recent years due to the financial turmoil there has been a marked increase in investor interest in gold. Gold has been called a "fear barometer" as when people are worried about the economy - they turn to gold which in turn forces the price up due to increased demand and limited new supply. The two main things that make people anxious are deflation and inflation. Most think that deflation is falling prices and inflation is rising prices. Actually, the fundamental cause are the deflating or inflating of the money supply. Unlike fiat (paper) money which can be created and destroyed at the whims of the government, gold has the remarkable ability to store value in both deflationary and inflationary times.

The correct way to think about owning gold is as insurance as gold stores it value nearly independent of economic conditions. One scary fact is almost every country has had at least one major "currency crisis" over the last one hundred years. Those that had some of their wealth in gold survived, however many people saw their savings become worthless as the government inflates the paper currency.

Between the years 560 to 546BC in western Asia Minor the first gold coins were struck by King Croesus, ruler of Lydia. His wealth came from the gold from the mines and sands of the River Pactolus. Since then gold coins have been legal tender. Bullion coins and small bars offer private investors an attractive way of investing in relatively small amounts of gold due to its compact, high value nature. In many countries gold purchased for investment purposes is exempt from Value Added Tax.

Bullion coins

Investors can choose from a wide range of gold bullion coins issued by governments across the world ranging from gold Krugerrands, gold sovereigns to American gold eagles. These coins are legal tender in their country of issue for their face value rather than for their gold content. However, the gold content value is often vastly more than the face value.

For investment purposes, the market value of bullion coins is determined by the value of their fine gold content and an additional premium that varies between coins and dealers. The premium tends to be higher for smaller denominations, due to the fixed cost of fabricating the coins and bullion. Bullion coins tend to range in size from 1/20 ounce to 1000 grams, although the most common weights (measured in troy ounces) are 1/20, 1/10, 1/4, 1/2 and 1 ounce. It is worth noting that commemorative or numismatic coins are valued on their rarity, design and finish rather than on their fine gold content.

Small gold bars

Gold bars can be bought in a variety of weights and sizes, ranging from as little as one gram to 400 troy ounces (these are the typical bars you see in the movies stacked up in a safe). Small bars are defined as those weighing 1000g or less. Worldwide, there are around 94 accredited bar manufacturers and brands in 26 countries, producing a total of more than 400 types of standard gold bars between them. These bars normally contain a minimum of 99.5% fine gold.

Modern gold certificates are similar to origins of current bank notes. In the 17th century, gold certificates were issued by goldsmiths in London and Amsterdam to customers depositing gold to their safes. On deposit a receipt was issued, these gold receipt acted as proof of gold ownership. In time, the receipts (certificates) were used just like we use modern paper cash. In the mid-19th century, the US Treasury began to issue gold certificates that could be exchanged for gold from its vaults. These gold certificates circulated as money until 1933, when the US government banned private gold ownership inside the United States. Today, gold certificates continue to be issued by several German and Swiss banks, as well as by gold pool programs in Australia and the US. These certificates represent ownership of a certain quantity of gold bullion or gold coins.

The benefits to the owner of the gold certificate is that it saves money on gold trading, delivery, storage and insurance costs. However, the counter arguments are 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.

Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. A fairly recent development is digital electronic gold currency accounts which work on a similar principle as these swiss gold accounts. Gold accounts are typically backed through either unallocated or allocated gold storage.

Allocated (non-fungible) : You are allocated a fixed amount of gold, and typically pay a service fee to the bank or dealer for storing it for you. Therefore, if the bank or dealer goes bankrupt, the gold held in allocated storage should be returned to the client in full.

Unallocated (fungible or pooled): In this case, When you buy gold from a bank in 'unallocated' form. You become a creditor to the bank, i.e. the bank owes you gold which you do not own. The bank like unallocated gold as they can use this as part of their liquidity reserve, hence there is usually no storage fees. However, is they go bankrupt, the client will be unable to claim the gold and would become a general creditor.

Different accounts impose varying levels of inter-mediation between the customer and their gold. Some of the more established electronic gold accounts are provided in the side links.

Another way of getting investment exposure in gold is not to own it but invest companies which produce it. For example purchasing shares in gold mining companies, as the gold price 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 consider as there are many variables which affect the profitability of the mine.

Unlike gold bullion, gold shares or funds are regarded as high risk and are extremely volatile. This volatility is due to the inherent leverage, For example, if you own a share in a gold mine where the costs of production are $250 per ounce of gold and the price of gold is $500, the  profit margin will be $250 per ounce of gold mined. If there is a increase in the gold price to $550 per ounce, this will will push that profit margin up to $300, which actually represents a large increase in the mine's profit. Conversely, the same amplification happens if the price of gold decrease. To reduce this volatility, some gold mining companies hedge the gold price months in advance to reduce the exposure to short term gold price fluctuations, but as a consequence reduce potential returns when the gold price is rising.

This is probably the most common way to gain exposure to gold for the general public. Gold jewellery is usually described in terms of caratage (karatage), which indicates the purity of its gold content. Alternatively, gold content is also described in terms of ‘fineness’, where gold content is expressed in parts per thousand.

Since, one of the main drivers of the price for gold jewellery is based on the amount of gold in it, it is important for the consumer to know the carats of the gold in the item. Most jewellery worldwide is marked with the caratage or fineness standard. Pure gold (‘fine gold’) is 24 carats (karats) and so 24 carats is theoretically 100% gold.

In many countries only allow certain caratages of gold jewellery can be sold. In the UK, this is 9, 14 ,18 and 22 carat gold jewellery. In some countries, when the jewellery gold content is lower than 12 carats (50% gold or 500 fineness) it cannot be described as gold.

Additionally, depending on the craftsmanship and rarity in a piece of gold jewellery, it may sell many times beyond its worth in gold content.

As we know the desirability and value of gold it is often targeted by scammers and fraudsters. Some typical scams are

Non-existent Gold: This is a very common eBay fraud, because eBay make it so easy to remain anonymous

Fake Coins & Bullion: Coins can be coated with a thin layer of gold, with a cheaper metal underneath or the gold has been mixed with another least valuable metal.

Overpayment & Refund
A buyer makes a purchase from you and accidentally overpays, then asks for a refund of the balance.  The seller posts the coin together with a refund cheque for the difference. The buyer gets a special clearance on the sellers cheque, then his own cheque bounces.

Boiler Room Sales
Boiler room telesales frauds are big business for worthless penny share pushers. These scams usually involve fraudulent and misleading over-valuations of the companies.

As tempting as it is to invest all your hard earn cash into chocolate gold coins, do resist as in a moment of midnight madness your investment may become worthless.

And lastly, remember the number one golden rule, he who has the gold makes the rules.