Should I Buy Gold?
How to Profit from the Gold Boom

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Summary. Should I Buy Gold as an Investment?
Why People Buy and Own Gold
Why Gold Is Scarce
Quick History of Gold in the United States
When I Buy Gold, What Do I Buy?
What Is the Price When I Buy Gold?
The History of Gold Prices
Why Gold Is Not Money
What Determines the Price When I Buy Gold?
The Advantages of Buying Gold
How Do I Buy Gold for Investment?
Shall I Buy Gold Jewelry for Investment?
Should I Buy Gold Coins and Small Gold Bars?
Should I Buy Other Gold Investments?
How Do I Buy Gold Mining Shares?
How Do I Buy Gold Exchange Traded Funds?
How to Buy Gold Futures

Summary. Should I Buy Gold as an Investment?

When you buy gold, you have insurance against inflation, and you profit from the gold price boom. When you buy a share in a gold ETF, a gold mutual fund, a gold index fund or a gold futures contract, you are not buying physical gold. These financial instruments are paper assets designed to track the gold price and to profit from gold. Gold bugs believe that, in the event of a doomsday scenario, only gold that is physically in their possession will provide useful value.

Why People Buy and Own Gold

When people buy and own gold they consider it as a store of value and a safe haven for wealth in economic crisis. One of gold's important properties is psychological, because it is so closely associated with money. This gives it an immeasurable advantage over other tangible stores of wealth. Most people readily associate gold's distinctive color with wealth, and consider the color of gold beautiful. King Midas of mythology, who could turn everything he touched into gold, had the first fatal case of “gold fever,” the frantic need to seek and hoard gold.

Gold was among the first metals to be mined because it commonly occurs in its native form, not combined with other elements, and because it is beautiful and imperishable, and because exquisite objects can be made from it.

People buy gold as a way to hold their wealth. Gold has lost its role as currency, but gold is expected to retain its purchasing power in the event of a collapse of the monetary system. The official gold reserves held by governments total 19% of all above-ground gold. The rest is held privately as jewelry, gold bullion and gold coins.

Why Gold Is Scarce

Gold is extremely rare. Gold is a precious metal found underground around the world. Underground gold veins or 'lodes' are produced in association with various minerals. As the other minerals are leached away over a long period, the gold becomes concentrated. Because the process of extracting gold from ore is costly, and requires the manipulation of large quantities of ore for a small yield of gold, the gold ore discovery must be concentrated in the ground about 1,000 times more than usual before it can be mined profitably. Ore of sufficient yield is very rare. Half of all the un-mined gold is in South Africa.

Above ground, gold is rare, too. All the gold that has ever been mined would hardly fill a cube with the length, width and height of a tennis court. The total gold production of all time totals about 140,000 tons.

Quick History of Gold in the United States

Gold played an important part in the history of the United States. The discovery of gold at Sutter’s Mill in California sparked the gold rush of 1849-50. Other famous nineteenth century gold discoveries are the Comstock Lode in Nevada and the Cripple Creek deposits in Colorado. The Goldfield deposits in Nevada and the Alaskan placer deposits were discovered at the turn on the century. By that time the United States produced over 4 million troy ounces a year. The largest gold mine in the United States is the Homestake Mine at Lead, South Dakota.

In April 1933, as a consequence of the Great Depression, the US government made it illegal to have more than $100 in gold or gold certificates. The punishment for owning gold was two years imprisonment and a large fine. From 1933 to 1975, it was a crime to buy gold or to invest in gold.

Shortly after the start of World War II, gold mines were closed by the War Production Board and not permitted to reopen until 1945.

When I Buy Gold, What Do I Buy?

Gold is bought, sold and priced in Troy ounces. One Troy ounce is about 1.1 avoirdupois ounces. Gold is heavy. A bar of gold is about the size of an ordinary building brick (7 x 3.6 x 1.75 inch) and weighs about 27.5 pounds (about 400 troy ounces). Bars are stored in the vault without wrappers. The gold bar is marked to indicate the gold content or fineness. The minimum acceptable fineness is 995 parts per thousand fine gold. Other marks on the bar include the serial number, the assay stamp of the refiner, and the year of manufacture.

When you buy gold jewelry it is marked 14 karat, 18 karat or 24 karat. Karat indicates what proportion of the metal is gold. 14Karat gold is an alloy containing 14/24 gold and 10/24 other metals, 14 karat gold is 58% gold. 18 Karat gold is 18/24 gold, and 24 Karat is 100% gold.

What Is the Price When I Buy Gold?

The benchmark for the price of gold is known as the London Gold Fixing, set twice a day by representatives of five gold bullion trading firms. Gold traders also rely on the intra-day spot price, determined by gold-trading markets around the world as they open and close throughout the day.

The History of Gold Prices

The Price to Buy Gold From 1910 to 2005 Dollars per Troy Ounce
1910	20.67
1920	20.67
1930	20.67
1940	34.50
1950	40.25
1960	36.50
1970	37.60
1980	641.20
1990	423.80
2000	272.15
2005	513.00

The price of gold was controlled by the government until 1971. Gold prices peaked in 1980 at $870 during the oil crisis. At the peak, giddy people rushed to melt down gold jewelry and sterling silverware for the value of the metal it contained. But the party was soon over and gold fell to a low of $250 in 1999. Over the same period, while gold fell about 2.5% each year, the S&P 500 Index yielded over 16% profit annually.

However, since bottoming out in 2001, the price of gold has turned around magnificently and the story really gets interesting. In five years, the spot price of an ounce rose 135%, compared with 4.5% for the S&P 500 Stock Index. In the same period, the Philadelphia Gold and Silver Index XAU, which measures the stock prices of 14 gold mining companies, rose 196%, while the Amex Gold Bugs Index HUI, also a measure of the stocks of gold mining companies, rose 751%.

Why Gold Is Not Money

Many nations through the ages have used gold as their money. Gold items were often buried with pharaohs to use in the after-life, because gold is free from corrosion or decay. In the United States, paper money was backed in part by gold reserves held at Ft. Knox. In theory, when a monetary system is based on the gold standard, a citizen could ask that the government give him gold in exchange for paper money. The United States went off the gold standard in 1971, along with other nations. Since then, nations have been gradually selling off their gold reserves in the gold markets. Now the US gold reserve would fit inside a few rooms. Fort Knox is mostly empty space.

It is not possible to use gold as the only currency of a nation. A dime’s worth of gold would be the size of one sugar crystal. And then, too, there is not enough gold in the entire world to meet one week’s payroll in the United States.

What Determines the Price When I Buy Gold?

The price of the gold you buy moves with the price of oil and other commodities. It also moves higher when the dollar loses value. Gold investors study international stability, the growth of GDP (Gross Domestic Product), inflation, interest rates, productivity and energy prices, all of which can affect the price of gold.

The supply of gold and the demand for gold also play a role in its price. The demand of gold is affected by jewelry manufacturers (80%), investment (10%) and for electronics and dental use (10%). India is the biggest buyer of gold for jewelry because of its importance in the Indian marriage ceremony. The United States is second largest buyer of gold for jewelry.

The supply of gold to buy comes from mining output, from governments selling off their reserves, and from the recycling of hoarded gold. Gold exploration fell off in the 1990’s as the price of gold declined, and development of a new mine takes five years or more, so the supply of new gold in the market has not increased lately.

Because most gold ever mined is still in existence, and because buyers of gold are secretive, analyzing the supply and demand for gold is more difficult than for other commodities. According to the World Gold Council, gold demand is at an all-time high. 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 buyers. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%. The Russian and Chinese governments have each expressed the intention of increasing their gold reserves, so this is an additional factor in the demand for gold.

However, the price of gold that you buy is affected more by changes in sentiment, rather than by changes in mining production or gold jewelry manufacturing.

The Advantages of Buying Gold

When you buy gold, the value of your investment cannot be controlled by the government. Governments can expand the supply of paper money as part of the political agenda, and have often done so. This action dilutes the value of the paper money, and leads to inflation. Inflation has been defined as too much money chasing too few goods. An economic or political crisis which could cause money to be over-issued would threaten the value of the money you have saved. So, in the long term, the value of paper money depends on the reliability of the political mechanisms for exercising fiscal control.

Gold, unlike paper money, is scarce and cannot be created by politicians. Gold buyers believe that, in a meltdown of the economic system, if paper money becomes worthless, gold will still be accepted for value. The significant majority of people currently believe that our governments and our central banks have sufficient skill to manage the supply of money. But gold bugs quote the famous Greshams’s Law, that bad money will drive out good money.

How Do I Buy Gold for Investment?

You can buy gold in the form of coins, small bars or jewelry. You also buy assets valued like gold when you buy shares in mining companies, or shares in a mutual fund, or shares in a trust set up to track the price of gold (ETF), or gold futures contracts.

Shall I Buy Gold Jewelry for Investment?

Gold jewelry is an easy way to buy gold. However, for the general public, gold jewelry is not a good investment to buy. The value of jewelry is in the design and the gemstones it contains, as well as the gold. This value is subjective. The retail markup of an item of jewelry might be 300% of the value of the gold it contains. There are also sales taxes and import taxes to pay and the likelihood of theft or loss to consider. The resale price of gold jewelry is the wholesale price of the item; so if you buy gold jewelry at the retail price, you will often realize a loss when you want to sell it.

Should I Buy Gold Coins and Small Gold Bars?

There are two reasons people buy gold coins. Collectors buy numismatic coins on the basis of their rarity, rather their gold content. The gold investor buys a bullion coin whose price reflects the value of its gold content.

Gold bullion coins are in circulation around the world. There is the Australian Nugget, the Britannia and the Sovereign from Britain, the Maple from Canada, the South African Krugerrand and the United States Eagle. These coins are available in sizes of one troy ounce and fractional values, too. You can buy gold coins and small bars of gold priced from $100 to $10,000. Buy gold coins if you want physical possession of the gold and you anticipate long-term ownership. Because of the dealer’s spread between the quoted prices to buy gold and to sell it, the retail investor does not realize the market price for the gold. Other costs of ownership include delivery and storage.

Should I Buy Other Gold Investments?

Many investors want to buy gold but do not want to take delivery of physical gold. These buyers can participate in the price movement of gold through a range of financial instruments, whose price is based on the price of gold. The gold investor can own shares in gold mining companies, gold mutual funds, gold index funds, electronically traded gold funds (ETF), and gold futures contracts.

How Do I Buy Gold Mining Shares?

Gold investors can buy shares of stock in gold mining companies, producers such as Barrick or Newmont Mining. Their stock prices move with the price of gold, but they are more volatile The production costs of mining gold are relatively fixed, so a small change in the price of gold will cause a larger change in the price of the mining stock. If you want to buy gold mining shares that participate in the gold price movement, do not buy the companies that hedge their gold production, which is to say, gold mining companies that pre-sell their future production at a current fixed price.

How Do I Buy Gold Exchange Traded Funds?

You can buy a gold Exchange Traded Fund (ETF) the same way you buy stocks. An ETF allows you own an interest in the physical gold bars held in trust for investors. The price of the gold ETF you buy will move in sync with the price of physical gold.

There are now two ETF's tracking gold prices. They are the streetTRACKS Gold Trust, listed on the New York Stock Exchange with the symbol GLD, and the iShares COMEX Gold Trust, listed on the New York Stock Exchange with the symbol IAU. Each ETF share represents one-tenth of an ounce of gold, backed by gold bullion held in a vault. The prices of GLD and IAU shares move exactly in sync with the spot price of gold. They are fully backed by gold which is both deposited and insured. The inventory of gold is managed by the trust, which buys and sells gold on the open market.

When you buy gold ETF shares you can have an investment in gold without taking possession of it. The ETF shares are liquid and the spread between the prices to buy and to sell is small. However, investors should note that because they hold bullion, the gains of ETF gold shares are taxed as ordinary income, not as capital-gains.

The risk with ETF shares is that if ETF investors all suddenly panic, or if they behave differently from gold investors as a whole, the trust will have to sell its gold reserves in the open market, in order to buy back its shares from its investors. This will increase gold price volatility.

How to Buy Gold Futures

You can also buy gold in the futures market. Traders buy and sell contracts for the future settlement and/or delivery of fixed amounts of gold. The futures contract calls for settlement in three months. Until the contract expires, it is traded back and forth at prices based on the spot price of gold. The main futures exchanges which trade gold futures are COMEX in New York and TOCOM in Tokyo.

The speculator can buy the gold futures contract on “margin” by borrowing from the brokerage up to 98% of the cost. By buying on margin, the trader can leverage up his/her gains on a small investment, while at the same time accepting greater risks.

The gold futures contracts all expire at the same time. Traders do not want to take delivery of the actual gold, so they all close out their positions shortly before expiration, causing great price volatility, when the novice can get crushed. The costs when you buy gold futures include the spread between the buying and selling prices, the commission and the interest on the money you borrow, the margin.

The costs, psychology, behaviors and risks of buying gold in the futures markets are a complicated study in themselves.

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