Investing in Gold: How Does Is Work?
Gold – The Precious Metal
Few metals or minerals are endowed with the power and mystique of gold. It's been valued and even worshiped for its beauty and durability, and most of all for its value.
Gold also has tremendous power in the financial world. Indeed, the gold standard is one of the main benchmarks for finance and currency everywhere, and investors from around the world have gotten rich trading in the gold market.
Given all that, its worthwhile to learn as much as possible about gold. What follows is a kind of primer about all things gold-where its found, what it looks like, some of its chemical and atomic properties, and the basis for its value in various economic markets.
What is Gold: The Basics
Let's start with the fundamentals. Technically, gold is considered a transition metal, but it has its own chemical symbol, which is Au 79. Its atomic weight is approximately 196 g.mol-1. and it has a unique electronic configuration as well.
You're probably familiar with at least a couple of aspects of the physical description, but we'll supply a rundown anyway.
Gold is normally found as grains hidden in rocks and alluvial deposits, and it's known for its unique yellow color and bright, radiant shine. Gold is also known for its durability, which is based in part on the fact that it isn't affected a lot by either chemicals or humidity.
This durability is based on a variety of other factors as well. Gold has a high level of density, and its weight is approximately 19.3 g.cm-3 at room temperature.
Gold has several states of oxidation that are completely unique, and its electronegativity can be measured at 2.5 using the Pauling scale. There are also unique rates of release for ion energy as well as unique values for the covalent, atomic and Van de Walls radius.
It has a very high boiling point (2856 degrees Celsius), and its melting point can be measured using one of three different options. To complete the chemical picture, gold fuses and vaporizes at 12.55 kj mol-1 and 324 kj mol -1.
The etymology and history of gold are as almost as colorful as the metal itself is complex. The word gold dates back to an old Anglo-Saxon word, "geolu," which relates to the color yellow. The chemical symbol of gold, Au, can be traced to "aurum," a Latin word which means gold.
The actual date when gold was first found has an interesting history of its own. For a time many believed that gold was first found in California in 1848, which was the beginning of the so-called "gold rush."
But it has since been learned that gold was widely used by a number of ancient civilizations, most notably the Greeks and the Egyptians.
Why Gold Is So Expensive
The Value of Gold
In part, the value of gold is based on the fact that it's been used to make gold coins for hundreds, if not thousands, of years. Because of that it has became both an item of exchange and a method of payment, depending on the finance system being employed.
The weight of gold is typically expressed using gold and troy weight, but the expression of value most people are familiar with is the carat, which is the usually the main unit of measurement for gold.
If you're buying jewelry, for instance, the popular expression "24-carat gold" means you're getting pure gold, but gold is normally mixed with copper or silver in most jewelry applications.
In the world of finance, the price of gold depends on its current market value, which is measured and changed twice a day in the London market.
The price is also fixed by the several other financial institutions, specifically Barclays Capital and HSBC (A London banking conglomerate), among others. The final price is established by London Gold Market Fixing (Ltd).
Financial Markets and the Gold Standard
The gold standard has been an integral part of today's financial markets for decades now, but the basics of how it works are actually fairly simple.
The gold standard is basically a monetary system in which specific currency is based on a fixed price of gold (Au). As mentioned earlier, the price is fixed by various financial institutions, and both cash and bank deposits can be exchanged for gold.
Historically, the gold standard dates back to the 1700s, when the three types of gold used for the gold standard were established: gold specie, gold bullion standards and the gold exchange.
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The Three Different Types of Gold Standards
Let's start with the gold specie, which is directly tied to the value of the different gold coins that are in use. The gold specie standard actually dates back to medieval empire, with the Byzantines and the British West Indies being two fairly well-known examples.
The doubloon in Spain would be another one, and in 1873 the United States adopted this system, choosing the American Gold Eagle as its currency unit.
The second gold standard, the gold exchange, pertains specifically to the circulation of coins with a lower value than gold, e.g., silver.
Different countries make the choice to peg their currency units to the gold standard used in the U.S. and in Britain. One example of this would be the choice by Mexico, Japan and the Philippines to their exchange their silver coins at a rate of $0.50 per US dollar.
The gold bullion standard was first used in 1925 by the British Parliament, and it dictates that gold bullion be sold using fixed prices based on demand.
In 1931, though, the British government decided to banish the gold bullion standard to curb the flow of gold beyond the Atlantic Ocean, and that in turn resulted in the beginning of what became today's modern gold standard.
The financial system of standards used today has several advantages. One is the ability to deal with inflation-because currency isn't directly tied to gold, inflation can now be curtailed by limiting the amount of paper currency in circulation. In addition, exchange rates play a significant role in this process, for they develop fixed, stable patterns that help reduce economic uncertainty at a global level.
Contrast that with the gold bullion standard, for instance, which comes with its own set of limitations. Most economists believe it would be ineffective as an economic stabilizer because it has a limited effect on monetary policy.
In a true gold standard the availability of (Au) would be the sole factor determining the availability of money. But in today's economy a more complex, interactive system is used, with the value and price of gold being one of the more important variables in that system. That doesn't diminish the importance of gold in any way--it merely gives it a very important but fairly specific role.
Investing in Gold
It is never too late to invest in gold, at any price, and in any way. The years pass, but gold surely continues to exert a definite fascination for investors and non-investors. Cyclically, it returns to being a highly sought-after safe-haven asset.
Moments of crisis, such as the current post Coronavirus one, have encouraged many savers to buy gold. But, how does gold investing work in practice? There are several methods, and many reasons, to bet on the yellow metal and secure your money.
How To Invest in Gold?
Investing in gold is a safe operation. To be precise, gold investing can take place in different ways. To date, the most common form of investment gold includes buying:
- gold jewelry
- gold coins
- gold bars
Then, there is the possibility of financial investment in gold (Nonmonetary Gold). This option allows for buying real-time traded securities as if they were shares. Of course, the safest and most recommended investment gold is the physical one.
Best Gold Investment Practices
When preparing to invest in gold, it is essential to follow some precautions. First of all, it would be appropriate to have some knowledge of the gold market. For instance, study its fluctuations so that you can know when to invest.
The value of gold is constantly changing. Thus, it is important to keep yourself posted with the financial market. The first thing you need to know before investing in gold is, therefore, the price of the metal at that historical moment. On gold dedicated websites, it is possible to obtain the updated gold price in real-time.
Next, let's talk about purity. Often, gold does not appear in a state of purity. Especially in the case of ordinary jewelry, you would be surprised how common this is. In reality, blacksmiths generally mix gold with other metals.
This detail will make or break your deals. Karats are the standard unit of measurement of gold purity. On the positive side, there are several ways to determine the purity of your gold. Here are some methods:
- Find the stamp. It contains a number engraved on your jewel. Usually, it resembles a rhombus indicating the karats of gold present in the object.
- Test it with the magnet. Gold, like silver and platinum, is not magnetic.
- Nitric acid test. By any means, this is not a DIY test. A drop of nitric acid (a corrosive acid) on the jewel will reveal the gold purity. If the drop remains as it is, the test indicates that it is gold.
Why is Gold Investing Worthwhile?
Gold is considered the safe-haven asset par excellence. Indeed, it has survived thousands of years of socio-political, financial, and technological changes (see Bitcoin for example). Almost every time, it came out of it as the safest bet for investors. Can we say the same about any other currency on the market or stock? I do not think so.
Gold is a precious metal. Given that metals are limited in nature, the available stocks decrease over time. Thus, its monetary value is bound to increase. In fact, the demand for gold from emerging countries does nothing but fuel this constant growth.
Gold has always played a fundamental role during inflation crises. When the cost of living increases, the price of gold also grows. Historically, its value has gone hand in hand with rising prices. On the contrary, equities have always suffered from inflation.
How Much Gold To Buy For Properly Investing in Gold?
Most financial analysts and various savings gurus recommend converting 5% to 10% of your investments in gold. Conversely, the optimists even go up to 20-30%.
Furthermore, one of the rules of the model investor is to constantly invest portions of his or her budget monthly over time. It is the only way to avoid the risks caused by excessive volatility that could affect gold in the short term. In other words, when you invest in gold, you still have to think about the return of the investment. Therefore, frequently selling and buying gold in small batches will limit the risk of you losing money.
Here is a tip on how to invest in gold like a pro. As a rule of thumb, always buy a whole gold bar instead of little pieces for the same weight. In general, production costs will make the price rise a little bit more for smaller items.
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More Details on The Means of Investment in Gold
For those of you who want more detail about how to invest in gold, here is a section about specific methods such as a gold account or a gold certificate. Plus, we will see the difference between GETF and CFD for a savvy investment in gold. But first, let's start with the more basic methods.
Buying Gold Coins
Some of you would immediately think about the weight of a gold coin. However, that is not all that comes with gold coins. In addition to their weight in gold, gold coins are also a valuable investment because of coin collectors. In essence, there is a market within the gold market for gold coins.
The prices of gold coins greatly vary, as is the variety of coins that you can find on the market. Markedly, they range from the gold pound sterling, which is the most sought after as the best known in the world, to coins from all over the world such as the Austrian crown, the Krugerrand, the Swiss franc (Marengo) or the American Eagle.
The price of gold coins can range from a few hundred dollars and up to more than 1,500 dollars. The reason for this difference depends on the quantity of gold contained in them, the thickness or weight that is characteristic of each coin. In other words, it is also directly proportional to the gold price itself. The more gold they contain, the higher the monetary value.
Buying Gold Bars
Buying gold bars is an increasingly growing buying trend. Besides, collectors and small savers choose the precious metal par excellence as their investment or for a luxury gift of great and highly appreciated value.
Every gold bar contains a high economic value. Plus, you can easily sell your gold bars to bullion dealers. They will give you immediate liquidity guaranteeing the recovery of your investment.
By far, buying gold bars is the most common form of investment. However, you should be aware of the factors that influence the purchase of gold bars. These factors include the highest standards of production, refining, purity, and transport of each gold bar placed on the market. The hardest part of buying gold bars is to find legitimate proof of validity.
Managing a Gold Account
You might be familiar with the cliches related to the rich banks in Switzerland. Surely, a gold account is one of them. Some banks let you open a gold account. Within it, you deal with gold as you would with a foreign currency. Allocated or unallocated physical gold deposits may also come in the picture. Moreover, each gold account differs in terms and conditions. Usually, there is a minimum limit of purchase, and users can manage their account electronically.
The Traditional Gold Certificate
Until the 1930s, banks issued gold certificates daily. To explain what they are, they gave the full right to exchange them for gold. Gold certificate owners just went to the counters to withdraw the quantity of physical gold corresponding to the value printed on the certificate.
Some banks based in Switzerland, Germany and other foreign countries can issue you a modern gold certificate. As a result, you would receive a paper document. The gold certificate certifies the virtual ownership of a certain quantity of gold. Thus, physical gold is still not purchased personally by the investor. Instead, you get a certificate of ownership on a portion of the gold bars kept in the vaults by the financial institution. In the end, you have the convenience of buying nonmonetary gold rather than physical gold. In this case, you only have to securely store a document.
Gold Exchange Traded Funds (GETF)
Physical investment in gold can take the form of an exchange of electronic forms of storage for gold. Does it sound complicated? Actually, it is not that complex of a concept. If you know how the stock market works, you are already ahead of the curve.
In detail, you invest in gold digitally without having to worry about its storage. That is so because each unit of GETF equals one gram of gold. Indeed, it is a great way for beginners to start dealing with the real price of gold.
There are plenty of online brokers that sell GETFs. Generally, you can buy them through trading platforms that can be more or less intuitive. Thus, it is critical you find one that you can easily use to trade in GETF. Annual fees for commission and storage may apply.
Invest in Gold with CFDs
A contract for difference (CFD) is a speculative tool to invest in gold. Essentially, they are contracts based on the price changes of an underlying asset. Because you only bet on the value of that asset, you don't have to buy or invest directly in that asset.
With this in mind gold is just another asset. As such, you can buy a CFD related to it. Ultimately, you bet on the price change of gold. Either you think it will rise or fall. The gold price will change and reward some investors while playing against others
It is widespread in many financial institutions. Especially in the United Kingdom. For this market to exists, buyers and sellers are necessary at all times. The difference between the price of gold and the value of your CFD generates the gain or loss of money.
Precious Bullion Coins: The Krugerrand And More
Among the various forms of investment available, the purchase of valuable coins is one of the most loved by international collectors. Behind the passion for precious bullion coins, there is not only the goal of making a profit but also more. For one thing, the love for an object that has always tickled the wildest fantasies about treasure chests and adventures. Plus, the search for the rarest and most precious piece can get you addicted to collecting.
If you do not know the tricks of the trade, however, the purchase of investment coins can leave you unsatisfied. Thus, passion or not, it is better to know the lingo well and understand how to act to avoid paying more than necessary or even suffer varying scams and frauds.
In light of the present Coronavirus issue, this argument is even more valid than ever. COVID-19 is pushing many savers towards the purchase of safe-haven assets, such as precious bullion and collector coins. Especially the most precious and rare ones attracted an insane amount of attention.
What Are The Precious Bullion Coins?
There are many different opportunities on the market to invest in coins, but the approach can greatly vary. First of all, it is important to lay down a fundamental difference between the two categories of the product in question. Otherwise, the explanation is unclear. Here are the two main categories:
- Bullion coins
- Numismatic collector coins
In this case, the value of the coin depends, above all, on the raw material. Though, it is not a fixed rule. Many other factors can influence the final price. For example, the rarity and age of the piece can dramatically change its sales figure. Of course, the precious bullion coins are also eye candy. So, they lure many passionate collectors and investors alike. In terms of marketing, this aspect is not a secondary factor at all.
Frequently, a beautiful coin is worth more than one with the same quantity of gold, silver, or platinum but less pleasing to the eye. With the advent of the Coronavirus, rare and precious metals, such as gold, always the best safe-haven assets, are destined for a gradual but continuous increase in the price. Therefore, precious bullion coins are also considered excellent anti-COVID-19 assets.
Numismatic collector coins attract a particular kind of buyer. Generally, the term numismatic refers to coins that have historical value. Namely, they are ancient or particularly rare ones. In a way, they may remind you of stamp collecting.
In this case, the rarity, age, links to a particular historical event, the character imprinted by the minting process, and other details determine the monetary value of a coin.
The Krugerrand: the South African bullion coin
The best known South African gold coin is the Krugerrand. Since 1967, the government initially coined it without the idea of ​​using it as a currency. Indeed, they wanted only to support the South African gold market.
The name of the South African precious bullion coin originated from the engraving of the left-facing portrait of Paul Kruger. He was a politician of the late nineteenth century and president of the Republic of Transvaal. As can be seen, his face is on the obverse of the coin. On the Krugerrand's, we find a springbok. To specify, the springbok is the national symbol of South Africa.
The Krugerrand has an internationally known weight of 33.93 grams and a purity of 22 karats. Its weight of pure gold contained in each coin is roughly more than one ounce: 31,10 grams. Must be remembered, one ounce weighs 28 grams. The rest of the coin's mass contains 2,83 grams of copper. Surprisingly, this alloy gives the Krugerrand an orange appearance, unlike other gold coins minted in silver alloy.
The Krugerrand was the first coin to contain an ounce of fine gold. Thus, it became a legal instrument for proven possession of gold. In the USA, the possession of gold bullions was illegal. At that time, the Krugerrand became a method for US citizens to invest in physical gold.
After the sanctions against South Africa for apartheid, several western states banned the import of gold Krugerrand in the seventies and eighties. As a result, the production dropped significantly to the lowest lows of the 1990s. In the end, they began to rise again from 2000 onwards without ever returning to previous levels.
Other Famous Bullion Coins
Australian Gold Nugget
The Australian Gold Nugget, L. Series (1) & L. Series (2), is one of the bullion coins that arouses much interest from experts. Ordinarily, it is known as Nugget or Golden Kangaroo. To emphasize, one can cost $10,000 or more.
The first minting dates back to 1986 in solid gold, without the addition of other alloys. Several variations were created such as:
- one ounce
- two ounces
- ten ounces
- half-quarters, a quarter, a tenth and a twentieth of an ounce.
The Vienna Philharmonic gold coin (Wiener Philharmoniker) is by far the most beautiful Austrian investment gold coin. Surely, if you like classical music, you know the most famous and renowned orchestras in the world. Indeed, the name refers to the Vienna Philharmonic orchestra. It is a pure gold coin:24 karats. Since 1989, its design remained unchanged.
Canadian Gold Maple Leaf
The Maple Leaf weights 1 ounce (31.11 grams). Annually, the Canadian mint issues it. To be precise, its face value is five Canadian dollars. Also, a guarantee certificate comes with it.
Chinese Gold Panda
The Chinese Gold Panda is mind-boggling. In addition, the quotas for Chinese gold issues, dated 2012, are truly impressive. The Panda series is one of the most loved and collected precious bullion coins.
The Mexican Libertads take us back in time. The coin's origins date back to 1981, enriching the investment gold market where only the Krugerrand (since 1960) and the Maple Leaf (since 1979) have been present. Initially, this coin was called Onza, but a few years later its name was changed to Libertad. Alternatively, you can search for the gold coins of 50 Pesos of Mexico (Centenario). The Mexican Mint issued them from 1921 to 1947. To this date, they are more valuable than Libertads.
Vreneli is the diminutive in Swiss-German of Verena, which is the woman depicted on the obverse. Also, this coin is known as Marengo, which is its informal name. Usually, under one of the images, you find the engraver's name.
Most likely, the Gold Sovereign is the most widespread bullion coin. Like the Britannia, it is famous in the UK, where it came from. In the United Kingdom, Golden Britain is exempt from the Capital Gain Tax. That is, there is no taxation on the proceeds of the sale.
Finally, the American Buffalo, Eagle & Double Eagle are also great options to consider. American Buffalo is also known as Bison. It is by far the first coin that the United States government has coined in 24 karats. Many consider it to be one of the most beautiful coins in circulation.
At the request of the Polish National Bank, the Mint of Poland issues the Orzel Bielik. This precious bullion coin displays the silhouette of a white-tailed eagle (Bielik). There are several designs on the market at different prices.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 Arto Laakso