Gold As An Investment
How to Invest Successfully in Gold
What you've always wanted to know about gold
Investing In Gold
Gold is a precious metal found underground around the world. Gold is considered by many 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.
Gold is Scarce
 Gold is extremely rare. 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.
History of Gold in the United States
Gold played a 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 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.
What Does Gold Look Like?
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 14karat, 18karat or 24 karat. Karat indicates what proportion of the metal is gold. 14Karat gold is an alloy containing 14/24 and 10/24 other metals, which is 58% gold. 18Karat gold is 18/24 gold, and 24Karat is 100% gold.
How Is Gold Priced?
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 Price of 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 Story of Gold Prices
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%.
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 money. 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.
Why Do People Own Gold?
Although gold has lost its role as currency, people still rely on it as a way to hold their wealth. Gold is expected to retain its purchasing power in the event of a collapse of the monetary system.
Who owns the gold of the world?
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.
What Determines the Price of Gold?
 The price of gold 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 user of gold for jewelry because of its importance in the Indian marriage ceremony. The United States is second in this category.
The supply of gold 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 gold supply and demand 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. 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 is affected more by changes in sentiment, rather than by changes in mining production or gold jewelry manufacturing.
The Advantage of Gold
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 money, and leads to inflation, which 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 long term prosperity depends on the reliability of the political mechanisms for exercising fiscal control.
Gold, on the other hand, is scarce and cannot be created by politicians. Gold investors believe that, in a meltdown of the economic system, if paper money becomes worthless, gold will still be accepted for value.
Because the significant majority of people currently believe that our governments and our central banks have sufficient skill to manage the supply of money, gold’s use as money has stopped. Gold bugs quote the famous Greshams’s Law, that bad money will drive out good money, that is to say, paper will drive out gold.
How Do I Invest in Gold?
Gold can be owned in the form of coins, small bars or jewelry. Gold can also be held in paper form as shares in mining companies, shares in a mutual fund, shares in a trust set up to track the price of gold, and as gold futures contracts.
Shall I Invest in Gold Jewelry?
Gold jewelry is an easy way to own gold and enjoy wearing it. However, for the general public, jewelry is not a good investment. 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 sales taxes and import taxes to pay and the likelihood of theft or loss to consider. The resale price of jewelry is the wholesale price; so if you buy at the retail price, you will often realize a loss when you want to sell it.
Gold Coins and Small Bars for Investment
 There are two types of coin investors. Collectors price numismatic coins on the basis of their rarity, rather their gold content. The other type, 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. Gold coins and small bars are come in prices from $100 to $10,000. They are an appropriate investment for someone who wants physical possession of the gold and who anticipates long-term ownership. Because of the dealer’s spread between the price to buy and to sell, the retail investor does not realize the market price for the gold. Other costs of ownership include delivery and storage.
Other Gold Investments
Many investors do not want to take delivery of physical gold, but can participate in the price movement of gold through a range of financial instruments. The investor can own shares in gold mining companies, mutual investment funds, index funds, electronically traded funds (ETF), and gold futures contracts.
Gold Mining Shares
Gold investors also buy shares of stock in gold mining companies, producers such as Barrick or Newmont Mining. These 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 gold prices will cause a larger move in the price of the mining stock. If you want to buy mining shares that participate in the gold price movement, do not buy the companies that hedge their gold production, which is to say, companies that pre-sell their future production at a current fixed price.
Gold Exchange Traded Funds
An Exchange Traded Fund (ETF) allows investors to buy a share in gold in the same way that they can buy equity stakes in a company. You purchase an ETF in the same way you buy stocks.
There are now two ETFs tracking gold prices--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.
The benefit of an ETF is that 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 are not taxed at the capital-gains rate.
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 volatility.
Gold Futures as Investments
There is also a thriving gold 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 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, causing great price volatility, when the novice can get crushed. The costs of gold futures trading include the spread between the buying and selling prices, the commission and the interest on the borrowed money, the margin.
The costs, psychology, behaviors and risks of the futures markets are a complicated study in themselves.
Gold As An Investment, The Wrap Up
A share in a gold ETF, a mutual fund, an index fund or a futures contract is not physical gold and will never replace it. It is a paper asset designed to track the gold price and nothing more. Gold bugs believe that, in the event of a doomsday scenario, only gold that is physically in their possession will provide useful value.
My wish is that these investment tips bring you much success. I hope you have a very happy day.
-----Surfer Sam
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