Gold as an investment
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2008-07-12T10:44:53Z
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Reverted edits by [[Special:Contributions/219.93.152.4|219.93.152.4]] to last version by Joseph Solis in Australia (using [[WP:HG|Huggle]])
{{for|the physical properties and applications of gold|gold}}
[[Image:2006reserves_%28forex_and_gold%29.PNG|thumb|right|Reserves of [[Foreign exchange reserve|foreign exchange]] and gold in 2006]]
[[Image:Gold ingots.jpg|thumb|200px|A pile of "London Good Delivery Bars", theoretically 400 [[troy weight|Troy ounces]] (~12.5kg) each]]
This article discusses buying '''gold as an investment'''.
==Gold price==
The usual benchmark for the price of gold is known as the [[London Gold Fixing]], a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day [[spot price]], derived from gold-trading markets around the world as they open and close throughout the day.
The following table sets forth the gold price versus various investments and key statistics (''Note'': the prices on the following table and graphs are expressed in terms of nominal dollars, and thus are not adjusted for inflation):
{| class="wikitable" style="font-size:97%; text-align:right;"
|-
!rowspan=2| Year to<br />31<sup>st</sup><br />Dec.
!colspan=2| Gold Price<br />(US$/[[ounce|oz]])
!colspan=2| [[Silver]] Price<br />(US$/oz)
!rowspan=2| [[S&P 500]] <ref>S&P 500 [http://finance.yahoo.com/q/hp?s=%5EGSPC]</ref>
!rowspan=2| [[Dow Jones Industrial Average|Dow Jones<br />Industrial<br />Average]] <ref>Dow Jones Industrial Average [http://finance.yahoo.com/q/hp?a=&b=&c=&d=0&e=15&f=2006&g=d&s=%5EDJI]</ref>
!rowspan=2| [[Money supply|Money<br />Supply]] M3 <ref>Money Supply M3 [http://www.federalreserve.gov/releases/h6/hist/h6hista.txt]</ref><br />(US$ bn)
!rowspan=2| Average US<br />Farm Wages <ref>Farm Wages [http://www.usda.gov/nass/graphics/data/fl_allwg.txt][http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1063]</ref><br />(US$/hr)
!rowspan=2| [[United States public debt|US Govt Debt]] <ref>US Govt Debt [http://www.publicdebt.treas.gov/opd/opdpenny.htm]</ref><br />(US$ billions)
|-
!
!<small>(adjusted to<br />2006 dollar)<ref>Oregon State University (Conversion Factors applied to listed values)[http://oregonstate.edu/cla/polisci/faculty-research/sahr/sahr.htm]</ref></small>
!
!<small>(adjusted to<br />2006 dollar)<ref>[http://oregonstate.edu/cla/polisci/faculty-research/sahr/sahr.htm Inflation conversion factors for dollars 1665 to estimated 2017 to dollars of 2006 and other years<!-- Bot generated title -->]</ref></small>
|-
|1910||20.67||421.84||0.54||11.02||||59.60|| || ||2.6
|-
|1920||20.67||208.79||0.54||5.45||||71.95|| || ||25.9
|-
|1930||20.67||249.04||0.33||3.98||||164.58|| || ||16.2
|-
|1940||34.50||500.00||0.35||5.07||||131.13|| || ||43.0
|-
|1950||40.25||335.42||0.80||6.67||||235.42|| || ||257.4
|-
|1960||36.50||248.30||0.91||6.19||58.11||615.89||315.2|| ||290.2
|-
|1970||37.60||195.83||1.64||8.54||92.15||838.92||677.1|| ||389.2
|-
|1980||641.20||1567.73||15.65||38.26||135.76||963.99||1,995.5||3.50||930.2
|-
|1990||423.80||654.01||4.17||6.44||330.22||2,633.66||4,154.6||5.52||3,233.3
|-
|2000||272.15||318.68||4.60||5.39||1,320.28||10,786.85||7,117.7||8.10||5,674.2
|-
|2005||513.00||529.41||8.83||9.11||1,248.29||10,717.50||10,191.4||9.51||8,170.4
|-
|2008||1,002.00||790.40||14.59||14.29||1,288.14||11,869.65||Undisclosed||9.87||9,090.9
|}
==Factors influencing the gold price==
Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and disposal. Unlike most other commodities, the hoarding and disposal plays a much bigger role in affecting the price, because most of the gold ever mined still exists and is potentially able to come on to the market for the right price. <ref name="howstuffworks">[http://money.howstuffworks.com/question213.htm Howstuffworks "All the gold in the world"<!-- Bot generated title -->]</ref> <ref name="indestructable">[http://www.gold.org/value/markets/supply_demand/recycled.html World Gold Council > value > market intelligence > supply & demand > recycled gold<!-- Bot generated title -->]</ref> Given the huge quantity of hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.<ref>[http://www.gold.org/discover/knowledge/faqs World Gold Council > discover > gold knowledge > frequently asked questions<!-- Bot generated title -->]</ref>
According to the [[World Gold Council]], annual mine production of gold over the last few years has been close to 2,500 tonnes. <ref name "sd">[http://www.gold.org/deliver.php?file=/value/stats/statistics/pdf/Supply_Demand.pdf Please login to download > World Gold Council, the information resource for gold, investment, jewellery, science and technology, historical and culture > Please login to download<!-- Bot generated title -->]</ref> About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. <ref name "sd">[http://www.gold.org/deliver.php?file=/value/stats/statistics/pdf/Supply_Demand.pdf Please login to download > World Gold Council, the information resource for gold, investment, jewellery, science and technology, historical and culture > Please login to download<!-- Bot generated title -->]</ref> This translates to an annual demand for gold to be 1000 tonnes in excess over mine production which has come from central bank sales and other disposal. <ref name "sd">[http://www.gold.org/deliver.php?file=/value/stats/statistics/pdf/Supply_Demand.pdf Please login to download > World Gold Council, the information resource for gold, investment, jewellery, science and technology, historical and culture > Please login to download<!-- Bot generated title -->]</ref>
Central banks and the [[International Monetary Fund]] play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as [[official gold reserves]] <ref>[http://www.gold.org/value/markets/supply_demand/central_banks.html Official gold reserves]</ref>. 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 <ref>[http://www.gold.org/pr_archive/html/Wr991006.htm 400 tonnes/year]</ref>. European central banks, such as the [[Bank of England]] and [[Swiss National Bank]], have been key sellers of gold over this period <ref>[http://www.24carat.co.uk/goldsales.html UK Treasury & Central Bank Gold Sales<!-- Bot generated title -->]</ref>.
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 <ref>[http://en.rian.ru/russia/20051128/42241821.html Russia]</ref>. In early 2006, China, which only holds 1.3% of its reserves in gold <ref>[http://gold.seekingalpha.com/article/16299 A Gold Play on the Dollar's Demise - Seeking Alpha<!-- Bot generated title -->]</ref>, announced that it was looking for ways to improve the returns on its official reserves. Many bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. <ref>[http://www.marketwatch.com/news/story/story.aspx?guid=%7B23556CD8-DCCA-4870-BBF9-B36E41451F24%7D Dollar, gold see sharp moves on China's diversification talk - MarketWatch<!-- Bot generated title -->]</ref>
[[Image:Inflation-1923.jpg|thumb|200px|[[Inflation]] 1923-24: A woman in Germany feeds her tiled stove with money. The money was worth less than firewood.]]
[[Image:500000000000_dinars.jpg|thumb|200px|A 500,000,000,000 (500 [[1,000,000,000 (number)|billion]]) Yugoslavia dinar banknote circa 1993, the largest nominal value ever officially printed in Yugoslavia, the final result of [[hyperinflation]]. Photo courtesy of National Bank of Serbia.]]
In general, gold becomes more desirable in times of:
;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 coin]]s. 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 [[Franklin D. Roosevelt|President Roosevelt]] to impose a national emergency and to outlaw the holding of gold by US citizens. <ref>[http://www.the-privateer.com/1933-gold-confiscation.html The Roosevelt Gold Confiscation Order Of April 3 1933<!-- Bot generated title -->]</ref> known as [[Executive Order 6102]] which has since been ended.
;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 metal]]s.<ref>[http://www.zealllc.com/2001/realgold.htm Real Rates and Gold - ZEAL]</ref><ref>[http://www.zealllc.com/2007/realgold9.htm Real Rates and Gold 9 - ZEAL] </ref><ref>[http://www.europac.net/whitepapers/The%20Truth%20About%20CPI.pdf The shameful truth about the CPI - EUROPAC]</ref><ref>[http://www.amazon.com/dp/0470043601 Crash Proof: How to Profit From the Coming Economic Collapse by Peter Schiff]</ref><ref>[http://www.amazon.com/dp/140006337X Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market by Jim Rogers]</ref><ref>[http://www.amazon.com/dp/0470047666 Gold: The Once and Future Money by Nathan Lewis]</ref>
;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. <ref>[http://www.londonstockexchange.com/en-gb/pricesnews/investnews/article.htm?ArticleID=18378990 London Stock Exchange - Article<!-- Bot generated title -->]</ref> <ref>http://www.gold.org/pr_archive/pdf/GDT_Q3_07_pr.pdf</ref>
===Anti-trust litigation===
The [[Gold Anti-Trust Action Committee]] was organized in January 1999 to advocate and undertake litigation against illegal collusion to control the price and supply of gold and related financial securities. GATA underwrote the federal anti-trust lawsuit of its consultant, Reginald H. Howe -- Howe vs. Bank for International Settlements et al. -- which was pursued in U.S. District Court in Boston from 2000 to 2002. While the Howe suit was dismissed on a jurisdictional technicality, it became the model for Blanchard Coin and Bullion's anti-trust lawsuit against Barrick Gold and J.P. Morgan Chase & Co., which was filed in U.S. District Court in New Orleans in 2002 and prompted Barrick Gold's decision to stop selling gold in advance for 10 years. <ref>[http://www.gata.org/about GATA]</ref>
==Types of gold investor==
[[Investor profile|Investors]] may buy gold for a variety of reasons: among them include a desire to diversify their assets;<ref>[http://finance.yahoo.com/columnist/article/richricher/7810 Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More<!-- Bot generated title -->]</ref><ref>[http://www.gold-eagle.com/editorials_03/holmes053003.html How to Improve Asset Allocation<!-- Bot generated title -->]</ref><ref>[http://www.gold-eagle.com/editorials_05/daly061805.html Tactical Asset Allocation to Gold<!-- Bot generated title -->]</ref><ref> [http://www.morganstanley.com/GEFdata/digests/20060918-mon.html#anchor0]</ref><ref>[http://www.goldinvestingresource.com]http://www.goldinvestingresource.com</ref> to hide wealth from tax authorities; for reasons of political belief (e.g. [[Libertarianism|libertarian]]); or out of fear of an economic depression or other serious crisis (e.g. [[gold bug]]).
==Methods of investing in gold==
{{Main|Methods of investing in gold}}
Investment in gold can be done directly through bullion ownership, or indirectly through certificates, accounts, [[spread betting]], derivatives or shares.
==Investment strategies==
===Fundamental analysis===
[[Image:1 oz of Gold.jpg|thumb|right|One [[troy ounce]] along with the certificate]]
Investors using fundamental analysis analyze the [[macroeconomics|macroeconomic]] situation, which includes international [[economic indicator]]s, such as [[GDP]] growth rates, [[inflation]], [[interest rate]]s, [[productivity]] and energy prices. They would also analyze the total global gold supply versus demand. Over 2005 the [[World Gold Council]] estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes [http://www.gold.org/value/stats/statistics/gold_demand/index.html]. Others point out that total mine production is only about 2,500 tonnes each year, leaving a 1,300 tonne deficit that must be made up by central bank or private sales.<ref>[http://www.gata.org/node/4270 The Chevreaux Report]</ref> 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.<ref name="howstuffworks"/> <ref name="indestructable"/>
===Gold versus stocks===
[[Image:Longtermdowgoldlogtr1800.png|thumb|360px|The ratio of the Dow Jones Industrial Average index divided by the price of an ounce of gold. A surrogate index was used to generate all points before 1897. Note that this chart does not account for dividend reinvestment or tax consequences. Chart provided by www.sharelynx.com]]
The performance of gold bullion is often compared to stocks. They are fundamentally different asset classes: gold is a store of value whereas stocks are a return on value (i.e. growth 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 due in part to the stability of the American political system. <ref> Investments (7th Ed) by Bodie, Kane and Marcus, P.570-571 </ref>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 ratio peaked on January 14th, 2000 a value of 41.3 and has fallen sharply since. William Anton III wrote in the 2004 issue of Jefferson Coin and Bullion "...downward movement in the Dow/gold ratio is unlikely to stop precisely at the mean trendline. The extreme distension of the the 90s will likely overshoot to the opposite extreme in the current cycle." Source: [http://home.earthlink.net/~intelligentbear/com-dow-au.htm] [http://www.sharelynx.com/] [http://www.financialsense.com/fsu/editorials/schiff/2005/1013.html]
In November 2005, Rick Munarriz of Motley Fool.com 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 commuity and is serving to crystalize the broader debate. Source: [http://www.fool.com/investing/high-growth/2005/11/30/google-or-gold.aspx?source=mppromo] [http://us.rd.yahoo.com/finance/external/video/ts/SIG=125nv35km/*http://www.thestreet.com/_yahoo/video/strategysession/10389569.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA] At the time of writing, a share of Google's stock and an ounce of gold were both near $700. 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 24th 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]].<ref>[http://edition.cnn.com/2008/BUSINESS/03/13/world.markets/index.html, Gold, oil reach highs amid U.S. recession fears]</ref>
===Technical analysis===
As with stocks, gold investors may base their investment decision partly on, or solely on, [[technical analysis]]. Typically, this involves analyzing [[chart pattern]]s, [[moving average]]s, [[market trends]] and/or the [[business cycle|economic cycle]] in order to speculate on the future price.
===Using leverage===
[[Bullish]] investors may choose to [[Leverage (finance)|leverage]] their position by borrowing money against their existing gold assets and then purchasing more gold on account with the loaned funds. In order to keep the cost of [[debt]] to a minimum, these individuals would normally seek a [[loan]] in the currency with the lowest [[borrowing rate]], which, as of April 2006, was the [[Japanese yen]]. This technique is referred to as a "[[Carry (investment)|yen-gold carry trade]]". Leverage may increase investment gains but increases risk, as, if the gold price decreases, the investor may be subject to a [[margin call]]. Leverage is also an integral part of buying gold [[Derivative (finance)|derivatives]] and [[hedge (finance)|unhedged]] gold mining company shares (see [[Methods of investing in gold#Mining_companies|gold mining companies]]).
==Gold's value versus money supply==
{{cleanup-rewrite}}
[[Image:Historical price of gold.png|thumb|300px|right|Price of gold since 1968 (actual and inflation-adjusted)]]
[[Image:Au annual average USD price 1793-2005.png|thumb|300px|right|For many years, the dollar was pegged to the [[gold standard]].]]
Gold is [[money]], and in past societies was used as [[currency]].
Paper money was in many parts of the world used as notional representation of gold, with the ability to demand payment of the gold.
Increases in the supply of [[fiat currency]] through increased [[money supply]] have caused the fiat currency price of gold to increase. This is due to the fact that fiat currencies can increase in supply much more quickly than new gold can be brought onto the market.
Since the [[gold standard]] was ended on August 15, 1971, an event called the [[Nixon Shock]] or [[Dollar Shock]] governments formerly tied to the [[Bretton Woods Agreement]] have been free to increase money supply without limitation. The currencies became "fiat" not linked to or representing a claim on gold or anything else.
==Bulls versus bears==
Since April 2001 the gold price has more than tripled in value against the US dollar [http://kitco.com/LFgif/au3650nyb.gif (as seen here)], prompting speculation that this long [[secular bear market]] (or the [[Great Commodities Depression]]) has ended and a [[bull market]] has returned <ref>[http://www.lewrockwell.com/thornton/thornton18.html A Bull Market in Gold – Technically Speaking by Mark Thornton<!-- Bot generated title -->]</ref> <ref>[http://www.ameinfo.com/75511.html Gold starts 2006 well, but this is not a 25-year high! | Financial Planning<!-- Bot generated title -->]</ref>. In March 2008, the gold price increased above $1000 <ref>[http://www.lbma.org.uk/2008dailygold.htm 2008 London Gold Fixings<!-- Bot generated title -->]</ref>, which in [[Real versus nominal value|real terms]] is still well below the $850 peak in 1980. In the last century, major economic crises (such as the [[Great Depression|Great Depression]], [[World War II|World War II]], the [[1973 Oil Crisis|first]] and [[1979 energy crisis|second]] oil crisis) lowered the Dow/Gold ratio (which is inherently inflation adjusted) substantially, in most cases to a value well below 4 [http://upload.wikimedia.org/wikipedia/en/8/84/Longtermdowgoldlogtr1800.png (as seen here)]. During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and [[silver|silver]]. The long-term trend in the Dow/Gold ratio since 2001 shows that such a
scenario is currently repeating. Major reasons are, among others, the rapid increase in [[Money supply|money supply M3]] in Europe <ref>[http://www.ecb.int/press/pr/stats/md/html/index.en.html Monetary developments in the euro area<!-- Bot generated title -->]</ref> and the USA <ref>[http://www.federalreserve.gov/Releases/h6/HIST/h6hista.htm Federal Reserve: Money stock measures<!-- Bot generated title -->]</ref> <ref>[http://www.shadowstats.com/alternate_data Money supply in the USA, alternate data series<!-- Bot generated title -->]</ref>
([[monetary inflation|monetary inflation]]) and the high [[double deficit (economics)|double deficit]] of the USA.<ref>[https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html CIA: Rank order - current account balance <!-- Bot generated title -->]</ref> <ref>[http://www.spiegel.de/img/0,1020,1034726,00.jpg Double deficit in the USA <!-- Bot generated title -->]</ref> These severe economic problems have been leading to the [[Subprime mortgage crisis|financial crisis]], high [[price inflation|price inflation]] and the strong depreciation of major currencies against commodities, most notably of the [[United States Dollar|US-Dollar]].
==References==
{{reflist}}
==See also==
*[[Diamonds as an investment]]
*[[Silver as an investment]]
*[[Palladium as an investment]]
*[[Platinum as an investment]]
*[[Full-reserve banking]]
*[[Gold exchange-traded fund]]
*[[Methods of investing in gold]]
==External links==
*[http://insidegold.com/wikipedia/ Current Gold Spot Price and Historical Gold Charts - USD/oz]
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[[Category:Gold investments|*]]
[[Category:Investment]]
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