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[edit]Gold price
Gold has been used throughout history as a form of payment and has been a relative standard for currency equivalents specific to economic regions or countries. Many European countries implemented gold standards in the later part of the 19th century until these were dismantled in the financial crises involving World War I. After World War II, the Bretton Woods system pegged the United States dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold.
Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a twice-daily telephone meeting of representatives from fivebullion-trading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day spot price, derived from over-the-counter gold-trading markets around the world. The following table sets forth the gold price versus various assets and key statistics:
| Year | GoldUSD/ozt[1] | DJIA USD[2] | World GDP USD tn[3] | US DebtUSD bn[4] | Trade Weighted US dollar Index[5] | |
|---|---|---|---|---|---|---|
| 1970 | 37 | 839 | 3.3 | 370 | ||
| 1975 | 140 | 852 | 6.4 | 533 | 33.0 | |
| 1980 | 590 | 964 | 11.8 | 908 | 35.7 | |
| 1985 | 327 | 1,547 | 13.0 | 1,823 | 68.2 | |
| 1990 | 391 | 2,634 | 22.2 | 3,233 | 73.2 | |
| 1995 | 387 | 5,117 | 29.8 | 4,974 | 90.3 | |
| 2000 | 273 | 10,787 | 31.9 | 5,662 | 118.6 | |
| 2005 | 513 | 10,718 | 45.1 | 8,170 | 111.6 | |
| 2008 | 865 | 8,776 | 54.6 | 10,700 | 96.1 | |
| 1970 to 2008 net change, % | ||||||
| 2,238 | 946 | 1,555 | 2,792 | |||
| 1975 (post US off gold standard) to 2008 net change, % | ||||||
| 518 | 930 | 753 | 1,908 | 191 | ||
In March 2008, the gold price exceeded US$1,000,[6] achieving a nominal high of US$1,004.38. In real terms, actual value was still well below the US$599 peak in 1981 (equivalent to $1417 in U.S. 2008 dollar value). After the March 2008 spike, gold prices declined to a low of US$712.30 per ounce in November. Pricing soon resumed on upward momentum by temporarily breaking the US$1000 barrier again in late February 2009 but regressed moderately later in the quarter.
After fluctuation returned near the US$1,000.00 mark in mid-September 2009, international gold markets peaked at US$1,023.30. Pricing later declined moderately again in late September 2009, falling back to US$991.70 for the week ending on September 25, 2009.
Later in 2009, the March 2008 intra-day spot price record of US$1,033.90 was broken several times in October, as the price of gold entered parabolic stages of successively new highs when a spike reversal to $1226 initiated a retrace of the price to the mid-October levels.
[edit]Factors influencing the gold price
Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand. Unlike most other commodities, hoarding (saving) and disposal plays a much bigger role in affecting the price, because most of the gold ever mined still exists in accessible form and is potentially able to come on to the market for the right price.[7][8] At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes.[9] This can be represented by a cube with an edge length of just 20.2 meters.
At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves.[10] Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.[11] According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.[12] About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.[12] This translates to an annual demand for gold to be 1,000 tonnes in excess over mine production which has come from central bank sales and other disposal.[12]
Central banks and the International Monetary Fund play an important role in the gold price. The Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 400 tonnes a year.[13] European central banks, such as the Bank of England andSwiss National Bank, have been key sellers of gold over this period.[14] 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.[15] In early 2006, China, which only holds 1.3% of its reserves in gold,[16] announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices.[17]
- Bank failures
- When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. 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 ownership of gold by US citizens.[18]
- Low or negative real interest rates
- If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.[19][20]
- War, invasion, looting, crisis
- In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.[21][22]
[edit]Investment vehicles
[edit]Bars
The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold "over the counter" of the major banks. Alternatively, there are bullion dealers that provide the same service. Bars are available in various sizes. For example in Europe, London Good Delivery bars are approximately 400 troy ounces[23] (around 12.5 kg). 1 kg bars (1 kg = 32.15072 Troy ounces) are also popular, although many other weights exist, such as the Tael, 10oz, 1oz bar, 10g, or 1 Tola.
Gold bars can be held either directly (i.e. held directly by you or in your own safe) or indirectly (held in a safe deposit box or bank vault on your behalf). Because of the many difficulties of transporting, storing and verifying pure gold bars, an increasingly popular method of investing in gold bars for the small investor is via allocated holdings using a gold account - see 'Accounts' below.
Bars are increasing in popularity as investment vehicles, as they carry lower premiums than gold bullions. It is estimated that the premiums on kilo gold bars can be at least $50 per ounce less than the premiums on bullion products such as the American Gold Eagles.[citation needed]
Gold bars for sale include 1-oz gold bars, 10-oz gold bars, kilo gold bars, and 100-gram gold bars. All these gold bars are .9999 fine (99.99 pure.).[24] It seems that the gold bars are primarily sold as kilo bars rather than 1-oz gold bars, due to the fact that they are much easier to store.
Kilo gold bars are .9999 fine (99.99% pure) and contain 32.15 troy ounces each. The most commonly available kilo gold bars are the PAMP and the Royal Canadian Mint (RCM) gold bars. PAMP kilo gold bars usually come with certificates. RCM bars do not come with either protective cases or certificates.[25] The PAMP certificate actually consists of the PAMP hallmark on the gold bars.
[edit]Coins
Buying gold coins is a popular way of holding gold. Typically bullion coins are priced according to their weight, plus a premium above the gold spot price. Again, the large Swiss and Liechtenstein banks buy and sell these coins over the counter.
One of the most popular gold coins is the American Eagle bullion coin, which is guaranteed by the United States Government and has been in circulation for over 300 years. The American Eagle coins contain a stated amount of pure gold and are made in four denominations, by the Department of Treasury.
The standard gold eagle coins have a fineness of 0.916 and have a face value of $50. The actual gold content of these coins is 1.0 troy ounce (31.103 grs). These US gold eagle coins are also minted in ½, ¼ and 1/10 ounce sizes.[26]
[edit]Exchange-traded funds
Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London, New York and Sydney. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold.
Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission 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.
Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and UITs.[27] The main differences are that ETFs do not sell directly to investors and they issue their shares in what are called "Creation Units" (large blocks such as blocks of 50,000 shares). Also, the Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF's portfolio. Usually, the Creation Units are split up and re-sold on a secondary market.
ETF shares can be sold in basically two ways. The investors can sell the individual shares to other investors, or they can sell the Creation Units back to the ETF. In addition, ETFs generally redeem Creation Units by giving investors the securities that comprise the portfolio instead of cash. Because of the limited redeemability of ETF shares, ETFs are not considered to be and may not call themselves mutual funds.[27]
[edit]Certificates
A certificate of ownership can be held by gold investors, instead of storing the actual gold bullion. Gold certificates allow investors to buy and sell the security without the inconvenience associated with the transfer of actual physical gold.
Gold certificates may be described as the first paper bank notes. They were first issued in the 17th century when they were used by goldsmiths in England and The Netherlands for customers who kept deposits of gold bullion into their safe-keeping. Two centuries later, the gold certificates began being issued in the United States when the US Treasury issued such certificates that could be exchanged for gold. The United States Government first authorized the use of the gold certificates in 1863. In the early 1930s the US Government restricted the private gold ownership in the United States and therefore, the gold certificates stopped circulating as money. Nowadays, gold certificates are still issued by gold pool programs in Australia and the United States, as well as by banks in Germany and Switzerland.
[edit]Accounts
Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Digital gold currency accounts and the BullionVault gold exchange work on a similar principle. Gold accounts are typically backed through unallocated (fungible or pooled) or allocated (also known as non-fungible) gold storage. Different accounts impose varying levels of intermediation between the client and their gold, for example through bailment or within a trust. Bailment is the legal action of a client entrusting their physical property to another party for safekeeping, and paying for the service.
[edit]Derivatives, CFDs and spread betting
Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX), and NYSE Liffe US. In India, gold futures are traded on the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).[28]
Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK, provide contract for difference (CFD) or spread bets on the price of gold.
[edit]Mining companies
These do not represent gold at all, but rather are shares in gold mining companies. If 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 to take into account and it is not always the case that a share price will rise when the gold price increases.
Unlike gold bullion, which is regarded as a safe haven asset, unhedged gold shares or funds 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 mining exploration.
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.
[edit]Investment strategies
[edit]Fundamental analysis
Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the yearly global gold supply versus demand. Over 2005 the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.[29] While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity.[7][8] Identifiable investment demand for gold, which includes gold exchange-traded funds, bars and coins, was up 64 percent in 2008 over the year before.[30]
[edit]Gold versus stocks
In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/Gold ratio, an indicator of how bad a recession is and whether the outlook is deteriorating or improving, to a value well below 4. The ratio fell on February 18, 2009 to below 8.[30] During these difficult times, many investors tried to preserve their assets by investing in precious metals, most notably gold and silver.
The performance of gold bullion is often compared to stocks due to their fundamental differences. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e., growth from anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold in part because of the stability of the American political system.[31] This appreciation has been cyclical with long periods of stock outperformance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union's invasion of Afghanistan and the threat of the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and has fallen sharply since.
On November 30, 2005, Rick Munarriz of The Motley Fool posed the question of which represented a better investment: a share of Google or an ounce of gold. The specific comparison between these two very different investments seems to have captured the imagination of many in the investment community and is serving to crystallize the broader debate.[32][33] At the time of writing, a share of Google's stock was $405 and an ounce of gold was one day from breaking the $500 barrier, which it did December 1. On January 4, 2008 23:58 New York Time, it was reported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closing at $859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges. On January 24, 2008, the gold price broke the $900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time ever on March 13, 2008 amid recession fears in the United States.[34] Google closed 2008 at $307.65 while gold closed the year at $866. Leading into 2010, Google had doubled off that (100%), whereas gold had risen 40%.
[edit]Technical analysis
As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically, this involves analyzing chart patterns, moving averages, market trends and/or the economic cycle in order to speculate on the future price.
[edit]Using leverage
Bullish investors may choose to leverage their position by borrowing money against their existing assets and then purchasing gold on account with the loaned funds. Leverage is also an integral part of buying goldderivatives and unhedged gold mining company shares (see gold mining companies). Leverage or derivatives may increase investment gains but also increases the corresponding risk of capital loss if/when the trend reverses.
[edit]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 are free of VAT. Silver, and other precious metals or commodities, does not have the same allowance. Other taxes such as capital gains tax may also apply for individuals depending on their tax residency. U.S. citizens may be taxed on their gold profits at 15, 23, 28 or 35 percent, depending on the investment vehicle used.[35]
[edit]Scams and frauds
Gold attracts its fair share of fraudulent activity. Some of the most common to be aware of are:
- High-yield investment programs - HYIPs are usually just pyramid schemes dressed up with no real value underneath. Using gold in their prospectus makes them seem more solid and trustworthy.
- Advance fee fraud - Various emails circulate on the Internet for buyers or sellers of up to 10,000 metric tonnes of gold. This is more gold than the US Federal Reserve owns. Often naive middlemen are drafted in as hopeful brokers, and usually mention mythical terms like 'Swiss Procedure' or 'FCO' (Full Corporate Offer). The end-game of these scams is unknown, but they probably just attempt to extract a small 'validation' sum out of the innocent buyer/seller from their hope of getting the big deal.[36]
- Gold dust sellers - This scam persuades an investor there is real gold with a trial quantity, then eventually delivers brass filings or similar.
- Counterfeit gold coins.
- Shares in fraudulent mining companies with no gold reserves, or potential of finding gold,[37] as per the American saying, attributed to Mark Twain but unsourced, that "A gold mine is a hole in the ground with a liar on top."[38]
[edit]See also
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