Of all the precious metals, gold is the most popular as an
investment. Investors generally buy gold as a hedge or safe
haven against any economic, political, social or currency-based
crises. These crises include investment market declines,
burgeoning national debt, currency failure, inflation, war and
social unrest. Investors also buy gold early in a bull market
and sell it before a bear market begins, in an attempt to gain
financially.
Gold has been used throughout history as a form of payment
and has been a relative standard for currency equivalents
specific to economic regions or countries. After World War II a
gold standard was established following the 1944 Bretton Woods
conference, fixing the gold price at US$35 per troy ounce, or,
in effect, pricing the U.S. dollar as 1/35th of a troy ounce of
gold.
The system existed until the 1971 Nixon Shock, when the US
stopped the direct convertibility of the United States dollar to
gold. Since 1919 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.
Investment in gold can be done directly through
ownership, or indirectly through certificates, accounts, spread
betting, derivatives or shares.
Other than storing gold in a
safe deposit box at a bank or in one's home, gold can also be
placed in allocated (also known as non-fungible), or unallocated
(fungible or pooled) storage with a bank or dealer. In the case
of the latter going bankrupt, the client will be unable to claim
the gold and would become a general creditor, whereas gold held
in allocated storage should be returned to the client in full.
However even with gold held in allocated storage, many gold bugs
would still choose their storage provider carefully, making sure
of high net worth, with some preferring an offshore bank or
storage facility.
Biscuits and Bars
The most traditional way of investing in gold is
by buying bullion gold bars. In some countries,
like Argentina, Austria, Liechtenstein and
Switzerland, these can easily be bought or sold
"over the counter" of the major banks.
Alternatively, there are bullion dealers that
provide the same service. Bars are available in
various sizes, for example in Europe these would
typically be in 12.5kg or 1kg bars (1kg =
32.15072 Troy ounces), although many other
weights exist, such as the Tael, 10oz, 1oz bar,
10g, or 1 Tola. Gold bars can be held either
directly (i.e. held directly by you or in your
own safe) or indirectly (held in a vault on your
behalf). Because of the many difficulties of
transporting, storing and verifying pure gold
bars, an increasingly popular method of
investing in gold bars for the small investor is
via allocated holdings using a gold account
Coins
Buying gold coins is a popular way of holding gold. Typically
bullion coins are priced according to their weight, with little
or no premium above the gold price. Among the most popular
bullion gold coins are the South African Krugerrand, the
Canadian Gold Maple Leaf, the American Gold Eagle, the American
Gold Buffalo, and the Australian Gold Nugget, all of which
contain exactly one troy ounce of gold each. Other popular one
ounce bullion coins include the Chinese Panda, and the Austrian
Philharmonic. Gold coins used as bullion coins include the
British gold sovereign and the Swiss Vreneli, but these are much
lighter than one ounce. Again, the large Swiss and Liechtenstein
banks buy and sell these coins over the counter. Also available
is the gold dinar, which has Islamic significance.
Exchange-traded funds
Gold exchange-traded funds (or GETFs) are traded like shares on
the major stock exchanges including London, New York and Sydney.
The first gold ETF, Gold Bullion Securities (ticker symbol
"GOLD"), 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[citation
needed]
Gold ETFs represent an easy way to gain exposure to the gold
price, without the inconvenience of storing physical bars.
Typically a small commission is charged for trading in gold ETFs
and a small annual storage fee is charged. 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. In some countries, gold ETFs
represent a way to avoid the sales tax or the VAT, which would
apply to physical gold coins and bars. economies of scale,
liquidity, and ease of purchase and sale make ETFs an
increasingly popular method of investing in gold.
Certificates
A certificate of ownership can be held by gold investors,
instead of storing the actual gold bullion. Gold certificates
allow investors to buy and sell the security without the
inconvenience associated with the transfer of 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. Others counter that, due to
the difficulties of owning and storing a significant amount of
gold, a government backed and guaranteed product is the most
convenient and cost effective route to take.
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