INVESTMENT - How does gold work as an investment strategy?

 

    As I am not a financial planner or investment advisor or anything of the sort, this page is not to be taken as investment or financial planning advice (which of course should be undertaken with your broker or financial planner). Rather, this page intends to serve as a quick overview, a starting point, from which to further explore the subject. In the compilation of this page I’ve endeavoured to use the most unbiased sources possible, including the Wikipedia pages on gold investing. I recommend similar research for anyone wishing to gain more insight into the following overview.


    Gold has proven itself over the decades and centuries to be one of the safest, and perhaps the safest, store of wealth. Investors generally buy gold as a hedge or safe haven against economic, political, social or currency-based crises. The relatively recent Global Financial Crisis of 2007-2009 saw the gold price rise to record highs of over US$1000 per troy ounce, showing that investor confidence in the safety of gold investment is as high as ever. In fact, since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that a bull market in gold (increased investing in anticipation of future price increases) has returned. A World Gold Council report released 18 February 2009 showed physical gold demand rose sharply in the second half of 2008.


    Investment in gold can be achieved in a variety of ways: either directly through ownership of gold bars, coins or nuggets, or indirectly through gold exchange-traded funds, certificates, accounts, spread betting, derivatives, or gold mining company shares.


    Purchasing gold bars (bullion) is perhaps the most traditional way of investing in gold. These can be bought through dealers, or in some countries from major banks. They come in all sorts of sizes, from troy ounces to many kilograms. They can be held directly in your own home or safe, or indirectly in a bank vault. They are valued    As I am not a financial planner or investment advisor or anything of the sort, this page is not to be taken as investment or financial planning advice (which of course should be undertaken with your broker or financial planner). Rather, this page intends to serve as a quick overview, a starting point, from which to further explore the subject. In the compilation of this page I’ve endeavoured to use the most unbiased sources possible, including the Wikipedia pages on gold investing. I recommend similar research for anyone wishing to gain more insight into the following overview.


    Gold has proven itself over the decades and centuries to be one of the safest, and perhaps the safest, store of wealth. Investors generally buy gold as a hedge or safe haven against economic, political, social or currency-based crises. The relatively recent Global Financial Crisis of 2007-2009 saw the gold price rise to record highs of over US$1000 per troy ounce, showing that investor confidence in the safety of gold investment is as high as ever. In fact, since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that a bull market in gold (increased investing in anticipation of future price increases) has returned. A World Gold Council report released 18 February 2009 showed physical gold demand rose sharply in the second half of 2008.


    Investment in gold can be achieved in a variety of ways: either directly through ownership of gold bars, coins or nuggets; or indirectly through gold exchange-traded funds, certificates, accounts, spread betting, derivatives or gold mining company shares.


    Purchasing gold bars (bullion) is perhaps the most traditional way of investing in gold. These can be bought through dealers, or in some countries from major banks. They come in all sorts of sizes, from grams through troy ounces to many kilograms. They can be held directly in your own home or safe, or indirectly in a bank vault. They are valued on their weight (gold content) and are generally purchased as a store of wealth or in speculation of a gold price increase. If held indirectly, such as in a bank vault, then costs of storage need to be considered against potential gains. Similarly, brokerage fees applicable at time of purchase and sale should be considered.


    Gold bullion coins are another way to hold gold. Some popular ones are the South African Krugerrand, the Canadian Gold Maple Leaf, the American Gold Eagle, the Chinese Panda and the Australian Gold Nugget, all of which come in one troy ounce versions. Other sizes can be available, including the one kilogram Australian Gold Nugget, one of the largest gold coins ever minted. Gold bullion coins are purchased for a premium over the actual gold price due to their comparative small size and the costs associated with manufacture, storage and distribution. The margin that is paid varies depending on what type of coin it is, the weight of the coin, and the prevailing demand. Some coins have a numismatic (coin collecting) value far greater than their bullion value due to their antiquity or rarity.


    Gold nuggets are the most natural form of gold, and are valued both on their gold weight and their individual beauty and uniqueness as natural specimens. Crystalline gold specimens in particular fetch a high price, and gold nugget value across the board is increased due to the fact they are a diminishing resource. As they come in such a diverse range of sizes, from kilograms down to less than a gram, they are a versatile purchase and are as popular for jewellery items and keepsakes as they are investment vehicles for their gold content. Gold nuggets can represent the easiest path to physical gold ownership, without the financial commitment of gold bars or the complexity of the gold coin market.


    Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges. The first gold ETF was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold (due to costs the amount of gold in each certificate is now slightly less). They are fully backed by gold that is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market. Gold ETFs can represent an easy way to gain exposure to the gold price without the inconvenience of storing physical bars, though a commission is charged for trading in gold ETFs and an annual storage fee is also applicable. 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.


    A certificate of ownership can be held by gold investors rather than storing actual gold bullion. Gold certificates allow investors to buy and sell without having to transfer actual physical gold. Some argue 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, whereas others say that a government backed and guaranteed product is more convenient and cost effective compared to owning and storing a significant amount of gold.


    Some banks offer gold accounts, where gold can be instantly bought or sold like a foreign currency. Similar in principle are digital gold currency (DGC) accounts, which is a form of electronic money based on gold and backed by gold through unallocated or allocated gold storage. Different accounts impose varying levels of intermediation between the client and their gold, for example through bailment (the legal action of a client entrusting their physical property to another party for safekeeping, and paying for the service) or within a trust.


    Gold can also be traded on various stock exchanges and in the private market using financial instruments called derivatives, such as forwards (an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today), futures (a standardised contract to buy or sell a specified commodity of standardised quantity at a certain date in the future and at a market-determined price being the futures price) and options (a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or to sell a particular asset on or before the option's expiration time, at an agreed price, in return for the seller collecting a payment from the buyer). Such contracts and transactions involve brokerage fees and require some understanding of the financial instruments themselves.


    Finally, profits from increases in the gold price can also be obtained indirectly through owning shares in a gold mining company (sometimes referred to as gold shares). If the gold price rises, the profits of the gold mining company could be expected to rise and as a result the company 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 mining company shares or funds are regarded as relatively high risk and volatile. This volatility is due to the inherent leverage in the mining sector, meaning that profits or losses are magnified in relation to the gold price rise or fall. 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.


    Which of the above methods of investing in gold one opts for is a decision based on investment goals as well as personal preference. Quite often there is a pull towards the physical investment options, due to the pleasure the investor receives from physical ownership of the gold itself. on their weight (gold content) and are generally purchased as a store of wealth or in speculation of a gold price increase. If held indirectly, such as in a bank vault, then costs of storage need to be considered against potential gains. Similarly, brokerage fees applicable at time of purchase and sale should be considered.


    Gold bullion coins are another way to hold gold. Some popular ones are the South African Krugerrand, the Canadian Gold Maple Leaf, the American Gold Eagle, the Chinese Panda and the Australian Gold Nugget, which all come in one troy ounce versions. Other sizes can be available, including the one kilogram Australian Gold Nugget, one of the largest gold coins ever minted. Gold bullion coins are purchased for a premium over the actual gold price due to their comparative small size and the costs associated with manufacture, storage and distribution. The margin that is paid varies depending on what type of coin it is, the weight of the coin, and the prevailing demand. Some coins have a numismatic (coin collecting) value far greater than their bullion value due to their antiquity or rarity.


    Gold nuggets are the most natural form of gold, and are valued both on their gold weight and their individual beauty and uniqueness as natural specimens. Crystalline gold specimens in particular fetch a high price, and gold nugget value across the board is compounded due to the fact they are a diminishing resource. As they come in such a diverse range of sizes, from kilograms down to less than a gram, they are a versatile purchase and are as popular as jewellery items and keepsakes as they are investment vehicles for their gold content. Gold nuggets can represent the easiest path to physical gold ownership, without the financial commitment of gold bars or the complexity of the gold coin market.


    Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges. The first gold ETF was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold (due to costs the amount of gold in each certificate is now slightly less). They are fully backed by gold that is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market. Gold ETFs can represent an easy way to gain exposure to the gold price without the inconvenience of storing physical bars, though a commission is charged for trading in gold ETFs and an annual storage fee is also applicable. 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.


    A certificate of ownership can be held by gold investors rather than storing actual gold bullion. Gold certificates allow investors to buy and sell without having to transfer actual physical gold. Some argue 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, whereas others say that a government backed and guaranteed product is more convenient and cost effective compared to owning and storing a significant amount of gold.


    Some banks offer gold accounts, where gold can be instantly bought or sold like a foreign currency. Similar in principle are digital gold currency (DGC) accounts, which is a form of electronic money based on gold and backed by gold through unallocated or allocated gold storage. Different accounts impose varying levels of intermediation between the client and their gold, for example through bailment (the legal action of a client entrusting their physical property to another party for safekeeping, and paying for the service) or within a trust.


    Gold can also be traded on various stock exchanges and in the private market using financial instruments called derivatives, such as forwards (an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today), futures (a standardised contract to buy or sell a specified commodity of standardised quantity at a certain date in the future and at a market-determined price being the futures price) and options (a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or to sell a particular asset on or before the option's expiration time, at an agreed price, in return for the seller collecting a payment from the buyer). Such contracts and transactions involve brokerage fees and require some understanding of the financial instruments themselves.


    Finally, profits from increases in the gold price can also be obtained indirectly through owning shares in a gold mining company (sometimes referred to as gold shares). 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 volatile. This volatility is due to the inherent leverage in the mining sector, meaning that profits or losses are magnified in relation to the gold price rise or fall. 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.


    Which of the above methods of investing in gold one opts for is a decision based on investment goals as well as personal preference. Quite often there is a pull towards the physical investment options, due to the pleasure the investor receives from physical ownership of the gold itself.