Investing in Gold

From Investing in Gold

Gold Around the World

Gold Around The World

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The gold price has different meanings for everyone. For some, it is a source of wealth, for others it is the cost of fine jewelry, and there are many more who just don’t really care about it.

Is There Value in the Gold Price?

No matter what your opinion on the precious metal, gold is an important resource in our world and plays a significant role in our global economy. Even if it doesn’t interest you from an investment or fashion standpoint, the gold price is sure to affect you in some way.

With such a difficult to understand value proposition and tremendous economic weight, many ask “why?”.

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Warren Buffet

While this may be true, in most countries gold has a very important role to play through deep rooted cultural traditions and as a store of wealth. It’s true that the gold price is simply the value that we assign to it, but in reality this could be argued for just about any scarce resource or capital in a free market economy.

One of the best ways of understanding the gold price is to simply think of it as a currency. While most other commodities have very real and useful value as a source of energy, construction or as food, gold is quite limited in its general usefulness. Likewise, commodities tend to get used up, contributing to a certain amount of continuous demand regardless of the investment interest in it. Gold, of course is always there. Even if it ends up being used in jewelry you can always melt it down and reclaim it into its purest form.

Gold as a Currency

The reason we can equate the gold price to currency is because it really is just used as a store and transfer of wealth, just like cash. The difference is that cash tends to become devalued over time (inflation), whereas gold price almost always has a consistent value compared to inflation.

There are many economic factors influencing the gold price, but the same is true for currency. If all countries and businesses used gold price as the standard of currency it would lead to much more stable levels of exchange and contribute to an easing global trade. Currently, if a company manufactures a product in one country for sale in another, the fluctuations in exchange rates can lead to huge risks to profitability. The recent rise in globalisation has had more to do with the easing of import duties and the establishment of large-scale trade agreements.

A common currency would be the final consummation of true free trade between countries, also known as a currency union. While this has been tried with a certain level of success in Europe with the establishment of the Euro, the idea of using gold price as a common currency for countries in different parts of the world has been suggested as the next major push towards global free trade.

Just such a scheme has been floated as being plausible by an OMFIF report commissioned by the World Gold Council looking into the potential impacts of changes to China’s monetary policy.

While this type of move would be profound and extreme to say the least, it does show the sentiment towards moving away from currency systems that are easily manipulated by governments and towards a more inclusive system that offers greater stability for the businesses that ultimately engage in trade.

Given all this, it seems that there is a role for gold price as an international store of value and commerce, providing a common currency across international boundaries.

Investing in Gold Bullion in Canada

Not only do we buy your old gold, but we also sell it in bullion form. Learn more about investing in gold bullion in Canada in this short video.

Stirling: and you also by the way Greg; sell gold and silver coins in bars and such, it’s not all your  … it’s a two-way street as far as Vancouver  Gold is concerned. You buy gold and a lot of it and other precious metals but you also sell it.

Greg: Sure, yeah – with the price of gold in Canada on its trajectory, lots of people becoming interested in investing in is well on they say you know if it’s going to keep on going up then … maybe it’s a good investment so we do sell it uh… in bullion form and coin so that the maple Canadian maple leafs that you mentioned … people can buy gold bars and silver as well, lots of people are investing in silver nowadays.

Stirling: There’s an interesting tax issue, attached to buying gold, Charlie.  If you buy one hundred percent pure gold like a Canadian maple leaf gold coin, it’s not taxable. If you buy an American gold coin, well of an ounce it’s taxable.  Why? Is it because it’s foreign or because the gold content?

Charlie: Yeah, first of all that’s just sales tax, you’re still capital gains tax can still be, you know, assessed on those pieces.

Stirling: .. at the point of sale

Charlie: Exactly, yeah.  Anything in Canada, anything less than ninety nine point five percent pure is subject to sales tax. So that includes jewelry and that’s the main reason, so people can’t get around that tax but it just so happens that a lot of these other kind of investment coins like the American eagle coin.

Stirling: .. and the Krugerrand – South Africa, right yeah?

Charlie: Those ones they are twenty two karat or ninety one percent pure, so they would be subject to sales tax. It’s not just that it’s American; you can buy American coins the American buffalo is that a pure gold American coin, so you can buy that here as well. We don’t see anywhere near as many of those as the Maple Leafs.  So the pure gold bars and coins are what you what we would definitely recommend for investing in gold.

Stirling:.. and the better business bureau again; more stuff that I’ve cribbed from your website,  the best better business bureau says be smart about this. Keep up with the prices. Know, at least have a feeling for what today’s prices are, when you walk in today so that  you’re not alien to the process.

Investing in Gold Factors

Investing in Gold – Factors That Influence the Price of Gold

Understanding the factors that influence the price of gold is crutial before making an investment in the precious metal. Equally important is to be aware of the key differences in the supply and demand of gold compared to other investments such as commodities, stocks and bonds.

Another factor to keep in mind; gold is not the only precious metal to consider when making this type of investment. Silver, Platinum and Palladium are also highly sought-after as investment vehicles, offer similar fundamentals to gold, but each have their own unique characteristics as an investment.

Factors Influencing the Price of Gold Bullion

The value in a gold coin or gold bullion is found in its precious metal content. While gold is pretty to look at in just about any form, when sought after for investment purposes its aesthetic appeal is not usually a consideration. Because of this, the value of gold bullion is tied directly to the market price for gold, and will fluctuate as the market moves, just like stocks, bonds and commodities.

How to Measure the Price of Gold

When quoting the price of gold, most business reports will show the price per troy ounce in US dollars. If you are following the market from outside the US, make sure to convert this price into your home currency, and know that one troy ounce is equivalent to about 31.1 grams.

Also note that the price quoted on the market is always for pure gold. Most jewelry is much less than pure (usually between 40-75%), bullion and coins however, are usually fairly high purities (above 90%).

With an understanding of the mechanics behind the price of a physical sample of gold, you can start to look at the market forces that cause the wide daily swings in price. They are listed in order of their impact on the daily price of gold.

1. Macroeconomic Data

By far the most influential metric on the price of gold is the daily economic information coming out of the worlds markets. Gold has historically always been a “safe haven” type of investment. Like real estate and cash, it is a place to put your money if things aren’t looking good elsewhere. When money is pulled out of the stock market it generally flows towards these types of investments, but in 2008 when the stock market and the real estate market experienced simultaneous crashes, gold seemed like the only safe play and, in turn, began its dramatic gains in price.

2. Inflation Pressure

Inflation is the theory that over time, the value of money will always go down as prices go up. While the average price of a house isn’t $40,000 like it was in 1975, the number of gold bars it would take to buy the same house is pretty consistent: $40,000 worth of gold in 1975 would be worth a little over $310,000 today.

This means that no matter what the market is for gold, in the long run it’s always better than holding cash without earning any interest on it. While gold doesn’t pay interest, its price does generally track the rate of inflation or better.

3. Supply and Demand of Gold

Supply and demand is the main drive of market pricing behind most commodities. While the gold price is much more complex than this basic formula, these factors do come in to play.

The supply of gold is largely dependent on its price, as the cost to mine it has become so high. It used to be quite easy to prospect and mine for gold, with plenty of stories from the gold rush of hitting the mother lode. Nowadays, it’s much more difficult to extract gold in large quantities and requires expensive equipment and technology. Also, since gold doesn’t really get “used up” or consumed the way other commodities do, there is always a large reserve of gold regardless of supply. So unlike most other commodities, the supply of gold will likely continue to be more reactive to its price than to have a direct impact on it.

The demand side is similarly consistent. As the price of gold drops, its demand in the use of jewelry increases (as jewelry is a discretionary spending item), but the investment demand for gold will generally drop as prices move on a downward trend. The reverse is true, of course if prices rise: jewelry demand for gold drops, and investment demand increases.

Future of Gold Prices

Look to the economy and the rate of inflation as the most likely indicators of gold price in the future. Another big recession or a sudden increase in the level of inflation could cause gold to make another big run up. Similarly, if things continue to improve in the global economy and inflation remains in check, gold prices will likely remain fairly stagnant and could even drop a little more.

View this article and others on Ezine

Investment Demand for Gold

The demand for jewellery as an investment comes in large part from reputation. While there are no direct factors that link gold prices to inflation, the US dollar, or economic and political concerns, investors’ expectations – as long as enough people believe – are powerful enough to create a relationship.

Bad news about the economy in the US and Europe sent more and more investors to gold as a perceived safe haven. The more investors who bought in, the higher prices rose justifying their purchase and creating a self-fulfilling prophesy. The fundamental problem is that this is the description of a market bubble. The fear is that the market created a pyramid scheme effect whereby the value and use of gold had barely increased but the speculative force caused prices to rise to a point that may not be sustainable in the long run.

Even the types of events that might usually lift prices can sometimes have the opposite effect because of real world supply pressure. The recent fall in prices is partly attributed to the idea that the struggling Cypress might sell their gold reserves to raise money. This comes after part of the previous rise in gold prices having been a result of investors rushing to gold to protect their wealth against the economic troubles in Europe.

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.


Comparing Gold, Stocks and Commodities

For the purposes of this post, I have examined gold from a supply and demand perspective rather than taking the traditional assumptions about what should move gold price.

The traditional narrative about gold prices is that gold is a safe haven investment and a way to protect your wealth against one of the following: inflation, weakness in the US dollar, and economic or political turmoil. These ideas are largely the result of gold’s historical use as a currency (or as a means of physically backing a currency) but in reality the most significant link between gold price and any of these factors exists simply because investors perceive that there is some link (and know that others do as well) and purchase accordingly. I would argue that a speculative link is not meaningful and can create a bubble that will eventually burst.

Unlike an investment like stocks, where the investor owns a piece of a company’s assets and profits, gold is a commodity (in the same category as agricultural outputs, oil, and building materials etc.). Stock prices are a result of the markets judgement of a company’s value taking into account, among other things, assets, profits, growth and risk. Commodities, on the other hand, are typically goods that can be spent, consumed or used.

With most stocks and commodities, the market gives frequent signals as to where the price should be. A stock that is expected to experience large growth, for example, will probably decline if the quarterly numbers come in below expectations (even if the company still made money and grew). These frequent corrections make long term speculation less common and reduce the likelihood of a long term bubble.

For a typical commodity, like corn for instance, the value comes from the intersection of supply and demand that creates the price. For example, if more consumers or industries demand corn, the prices will rise. Similarly, if there is a poor year for growing corn, the scarcity might cause prices to rise because of the lack of supply. Speculative markets for corn and other commodities certainly exist (the Chicago Mercantile Exchange being the large one), but the prices receive frequent feedback from the market and the commodities are typically consumed.

Unfortunately, gold is different.

Very little of the demand for gold comes from practical uses and purposes. Unlike other commodities, gold is not consumed by being eaten, fuelling cars, or used in construction. Almost all the gold that has ever been mined is still available for circulation. Only about ten percent of gold sold each year is used for its practical properties, the majority of which is used in technology. Even this gold is not spent or consumed – the tiny amounts of gold used in electronics are still so valuable that they are worth salvaging and very often will be melted, refined and added back into circulation. The rest of gold demand is split between jewellery demand (43%), Investment demand (35%) and official sector purchases (12%).

My colleague Gregory Neilson recently shared his thoughts on the inflationary pressure that is affecting gold prices, you can read his blog post on gold prices here.

Platinum Strengthening on Continued South African Woes

Canada Gold reported today that the recent dramatic price increases seen in Platinum are due largely to supply concerns coming out of South Africa.

Economic and labour conditions in that country are causing some large platinum mines to close, further tightening supply of the precious metal.

The price of platinum has risen beyond the price of gold in recent trading, now selling at  a sustained premium over the yellow precious-metal.

View the Canada Gold news blog by clicking the link below for the full story.

Platinum Prices Outpace Gold on Supply Concerns

Today, for the first time in 10 months, the price for platinum briefly outpaced gold. Historically platinum has always been the more valuable precious-metal, with supply and reserve levels roughly 15 times less than gold.

Last year however, with gold prices on a tear, the value of the yellow metal went on to eclipse those of platinum, with a similar story playing out until today’s breakthrough.

The reason for this change, according to industry observers, has been the weakening supply of platinum in the midst of increased industrial demand. Most of the mining supply of platinum (non-recycled) comes from South Africa, and today a major producer, Anglo American Platinum, announced they will close four of their South African mines, cutting production of the precious metal by 400,000 ounces per year.

Demand for platinum is also on the rise recently, it is used in the production of electronics and vehicle emission systems, both industries that have seen recent sales growth. Jewelry demand has also increased as platinum sold at a discount to gold but this trend will quickly reverse as the prices even out.

In The News

Every gold investor understands the tough decision that needs to be made regarding the quantity and weight of product to buy for each transaction.

One 5 oz gold bar will generally cost less than five 1oz bars, but provides much less flexibility when it comes time to sell. Most investors understand that it’s better to sell in smaller quantities over a period of time rather than all at once; meaning you pay more now to save later, or vice-versa.

Swiss refining company, Valcambi, aims to resolve those issues with their latest product, the “CombiBar”. Available in 50g bars, the CombiBar can be broken into individual 1g segments, not unlike a chocolate bar. Each 1g segment is stamped and certified .9999 pure gold.

The segments can be broken off without loosing any material and sold individually, they also cost less than buying 50 individual 1g bars as the 50g  CombiBar is sold as one piece of bullion.

European investors have been flocking to this new gold bullion since it was launched in December and now the company has announced that it will be available to North American gold investors later on this year.

So I guess we’ll be bringing back the popular candy bar jingle: “Gimme a break, gimme a break, break me off a piece of that gold bar!”