Gold Investments Explained
For thousands of years, gold has been viewed as a form of money and store of value. Like most commodities, the gold price is driven by supply and demand and, to a lesser extent, investor speculation. It is seen as an ideal investment in times of economic uncertainty. For those seeking to invest in gold, there are several ways to do so. Before we look at these, here are a few reasons why gold presents such good value for investors:
Governments’ Finances Are Out of Control
The damage that lack of financial responsibility can do has been seen over the last few years. First, we had the financial crisis (or credit crunch) generally blamed on the big banks inability to control their lending and their speculative greed (remember sub prime mortgages?). More recently, we have had the burgeoning debt of the United States and Europe getting out of control. Governments have been overspending for decades, and seem unable to control this.
At some point, this lack of fiscal restraint will lead to a further, and worse, financial crisis. There have been pointers over the last few years as to what will happen to the price of the precious metals when this occurs. Stock markets and government debt prices fall, and gold rises.
Central Banks Are Buying Gold Again
When central banks start to bolster their gold reserves, it a clue that there is widespread pessimism of the prospects for the world’s economy. According to the World Gold Council, there has been increasing demand from Central Banks, particularly Russia, Mexico, and Thailand. For the first time since the 1980’s, central banks have added to their stocks of gold for three years in a row.
India and China’s imports of gold surged to their highest levels ever in the second quarter of this year. This growth seems set to continue, particularly in China as it seeks to replace dollar denominated debt with gold as a hedge against a weakening dollar.
Savings Rates Have Negative Value
Even though the economies of the developed western world are sluggish at best – a double dip recession is now expected – inflation is still rising. Costs of energy – oil, electric, and gas – and basic foodstuffs are increasing at rates not seen for several years. Inflation in the USA is running at 3.8%, the highest it has been since mid 2009, and in the UK, Consumer Price Inflation is 4.5 %. Across the Eurozone countries, inflation is rising at 2.5%. Compare these to bank base rates (interest rates) in the three areas, 0%, 0.5%, and 1.5% respectively, and investors are actually receiving a negative rate of interest on money deposited in bank accounts. In such an environment, investors look for value in their investments. Gold traditionally provides this.
Measured Against Equities, Long Term, Gold Looks Cheap
By some measures, gold is still cheap. Equities performed remarkably from the mid-1980’s to shortly after the turn of the century. Gold has been catching up on equity investment returns for the last ten years, whilst equity indices have stagnated. Measured against the S&P 500, and according to some metals analysts, gold would have to reach a price of around $6400 an ounce to be considered on a par to its relative level of the early 1980’s.
Supplies of Precious Metals Are Limited
This is a given. Although as prices rise more mining becomes economic, which will add to supply in the short term, there is a finite amount of gold that the planet can give up. As the cost of production rises so to will the end price of the commodity. Small rises in demand will have a much higher impact to the upward momentum of this end price.
Ways to Invest in Gold Bars
Purchasing gold bars, or ingots, is a traditional way of investing in gold. Because they are flat, rectangular shaped, they are easily stored and can be bought in various sizes to suit the pockets of all investors. The standard size held by Central Banks as gold reserves is the 400-troy ounce bar (12.4kg) Good Delivery gold bar.
Coins and rounds
A common way of investing in gold is by collecting coins. This is seen as a hobby by many, and, unlike gold bars, the value of a coin is dictated not only by the weight and gold content of the said coin, but also by its ‘collectability’. This collectability is subject to its rarity, and numismatic value. Many new issues of coins, such as the Canadian Maple Leaf issues from the Royal Canadian Mint, are minted in limited numbers, and this helps to preserve value now and in the future. The collectability and high gold content of fine gold coins mean that they are sold with a higher premium over spot gold prices than bars. Where coins have a status as legal tender, gold rounds do not. A cross between a bar and a coin, gold rounds are produced by a large number of mints, are generally in the shape of a coin and usually contain one ounce of gold.
Gold certificates allow an investor to hold the rights to a quantity of gold without having to store the actual gold bullion. They let investors buy and sell the security without the complications associated with delivery and receipt of the physical asset.
Exchange Traded Funds
An Exchange Traded Fund is an investment fund whose shares are traded on stock exchanges, very much like stocks. An ETF will hold stocks, commodities, or bonds, and trade close to its net asset value. They are attractive to investors because of the low dealing costs, and, for many, are tax efficient investments. Gold ETF’s are a quick and easy way to gain exposure to the fluctuations of the gold price, and do not require the inconvenience of storing physical bars, coins, or rounds.
The very first ETF based on gold investment was the SPDR Gold Trust. This fund purchases its gold in 400-ounce gold bars and issue shares at one tenth of the price of an ounce of gold. Though there are now many other gold based ETF’s, the SPDR Gold Trust is still the most popular amongst investors. ETF’s can be purchased through stockbrokers.
An indirect way of gaining exposure to gold is to invest in the shares of gold mining companies. Many mining companies rarely mine gold alone, as it is normally found alongside ore containing other metals. Shares, therefore, should not be viewed as solely an investment in the fortunes of gold, but also in the qualities of other base metals. Investors in mining shares should also note that there are many factors to take into consideration when investing, other than solely the spot gold price.
Investment And Taxation
Returns are not simply a matter of the difference between the purchase price and sale price of the investment made. A major consideration is the taxable position of the product in which the individual has made the investment. Taxes that may be applicable to any investment include VAT, income tax and capital gains taxes, and vary from country to country. Anyone buying gold for its investment value alone should always be mindful of any taxes that may be applicable.
Over the coming weeks and months, thegoldeconomy.com will be posting more information about individual gold investments, news and commentary from the markets, as well as popular mining company profiles. We also welcome questions from our readers, and will endeavour to answer as many of these as possible.