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Gold as an investment

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Gold as an investment

September 13, 2018

For thousands of years, gold fascinated humanity. No other precious metal possesses so much power as gold does.

But what makes a precious metal? From all the symbols in the Mendeleev table, only a few fit into this category: gold, silver, palladium, platinum, and rhodium.

However, the last three were discovered much late than gold, and have characteristics that force people to use only advanced technologies to get the best out of them. Yet, gold is an obsession for over six thousand years.

Its power comes from the wonderful attributes it has. Firstly, it keeps its quality in time. And secondly, it comes in limited quantities.

All the gold ever mined in the world doesn’t exceed two hundred thousand ounces. And, new deposits are more and more difficult to find and exploit.

In fact, it is said that the timespan between finding a gold deposit and setting up its exploitation is anywhere from ten to twenty years. The current annual gold production is so small that major world powers struggle to grasp as much gold as possible to consolidate position.

Gold’s Mystery

Because gold keeps its quality in time (it’s a non-corrosive metal, for example), it means that, in one form or another, it all exists somewhere in the world. Either in the form of gold bars or jewelry, in the vault of a central bank or hidden in Switzerland bunkers, gold offered a great investment of time.

To this day, it is fascinating traders, from short-term to long-term oriented ones. How come?

Its secret comes from the store of value qualities. Gold offers a chance to diversify any portfolio and protect against all kind of economic troubles.

No matter what, gold keeps its value. I mean, it kept it for thousands of years, so chances are it will do so in the years to come too.

To this day, it is difficult to know exactly who owns how much gold. Some countries reveal their gold holdings, but some don’t.

If one sums up all the declared gold reserves and the estimated gold stored in jewelry, the result doesn’t fit with the entire quantity we know exists on the market.

Is Gold Money?

This question is so actual these days with cryptocurrencies on everybody’s lips that the similarities are astounding. Indeed, is gold money? Or, is bitcoin money?

To answer such question, the starting point should be the very definition of money. What is money, after all?

In time, money took various shapes. Trade is the reason for money: we need something from someone else, and we pay with money.

But the other party must accept the money we pay with. Nowadays, money represents a bill backed by a central bank’s credibility.

However, it wasn’t always like this. Before bills, coins were money. And, before coins, people were engaged in all kind of barter deals.

While the concept of money changed in time (barter, coins, bills, crypto, etc.), gold didn’t. It is the universally accepted store of value and will likely remain so.

Gold and Monetary Policy

Central banks are all too familiar with gold and its qualities. Why else they look for gold as a source of gaining influence for their country?

Because gold is so scarce, central banks tried to get as much of it as possible. Today, major central banks in the world and the IMF (International Monetary Fund) own only a little over ten percent of world’s gold. Where’s the rest?

Back in time, gold-backed currencies. The Bretton Woods system pegged the U.S. Dollar to gold on a $35/ounce.

Tellingly, the dollar was as good as gold. But it turned out the central bank, or the Fed, couldn’t engage in sophisticated monetary policy actions due to the lack of gold. I mean, you cannot print gold, right?

So, the Fed was trapped, and Nixon came to help. In 1971, in a decision known as the Nixon shock, the United States dropped the peg on gold.

From that moment on, other countries did the same. Today, no nation has the gold standard in place anymore. Yet, gold didn’t lose its value.

Owning Gold

As a trader, there are multiple ways to own gold. One is just to buy gold from various sources and store it in a safe place.

Typically, the safe place is associated with a safe country. People choose Switzerland or Singapore most of the times due to their government's stability.

But where to buy gold from? That’s easy, just open an Internet browser, and plenty of regulated firms will do that for you.

Another way is to buy paper gold. Paper gold or ETF (Exchange Traded Fund) is just a derivative.

Is it riskier than owning physical gold? Yes. Does it share the same qualities? No.

Then why people buy it? That’s simple: to speculate on its price.

Buying and owning physical gold bear some costs. Both for the transaction and for storing it. Hence, when people buy physical gold, typically they do it with the intention of keeping it for a long time, as a hedge against inflation, for example.

But the price of gold is denominated in U.S. dollars, which makes it subject to speculation. As such, ETF’s appeared. Or, paper gold.

With such a product, traders have instant access to the gold market. All they must do is to open an online trading account and start trading the ETF, providing the broker offers it. GDP is the most popular choice.

Yet another way to own gold is to go for the mining industry. I mean, why not owning shares in a mining company, rather than owning the physical stuff or an ETF?

Such a decision is not easy to make. Nor, safe.

The problem comes from the fact that there are many gold miners out there. Which one to own and how much?

Investing in shares also requires a more significant time horizon than trading ETFs. Traders buy and sell GLD multiple times during the trading day to profit from its liquidity.

We can’t say the same for stocks. A buy and hold strategy works most of the times in stock trading so that it might be the preferred choice here too.  

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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