Gold As An Investment

INTRODUCTION 

Of all the precious metals, gold is the most popular as an investment.^[1] Investors generally buy gold as a way of diversifying risk, especially through the use of futures contracts and derivatives. The gold market is subject to speculation and volatility as are other markets. Compared to other precious metals used for investment, gold has the most effective safe haven and hedging properties across a number of countries

                                                                GOLD PRICE TABLE

Year	GoldUSD/ ozt[6]	DJIA		World GDP		US Debt		Debt per capita		Trade-weighted US dollar index[7]
		USD[8]	XAU	USD (trillions)[9]	XAU (billions)	USD (billions)[10]	XAU (billions)	USD[11]	XAU
1970	37	839	22.7	3.3	89.2	370	10.0	1,874	50.6
1975	140	852	6.1	6.4	45.7	533	3.8	2,525	18.0	33.0
1980	590	964	1.6	11.8	20.0	908	1.5	4,013	6.8	35.7
1985	327	1,547	4.7	13.0	39.8	1,823	5.6	7,657	23.4	68.2
1990	391	2,634	6.7	22.2	56.8	3,233	8.3	12,892	33.0	73.2
1995	387	5,117	13.2	29.8	77.0	4,974	12.9	18,599	48.1	90.3
2000	273	10,787	39.5	31.9	116.8	5,662	20.7	20,001	73.3	118.6
2005	513	10,718	20.9	45.1	87.9	8,170	15.9	26,752	52.1	111.6
2010	1,410	11,578	8.2	63.2	44.8	14,025	9.9	43,792	31.1	99.9
1970 to 2010 net change, %
	3,792	1,280	...	...	...	3,691	...	2,237	...	...
1975 (post US off gold standard) to 2010 net change, %
	929	1,259	...	...	...	2,531	...	1,634

                                                      INFLUENCING FACTOR 
Like most commodities, the price of gold is driven by supply and demand, including speculative demand. However, unlike most other commodities, saving and disposal play larger roles in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewelry, with little value over its fine weight — so it is nearly as liquid as bullion, and can come back onto the gold market.^[12][13] At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes (156,000 long tons; 174,000 short tons).^[14] The investor Warren Buffet has said that the total amount of gold in the world that is above ground could fit into a cube with sides of just 20 meters (66 ft)^[15] (which is roughly consistent with 158,000 tonnes based on a specific gravity of 19.3). However, estimates for the amount of gold that exists today vary significantly and some have suggested the cube could be a lot smaller or large

                                                                       Central banks

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% of all above-ground gold as official gold reserves.^[18] The ten-year Washington Agreement on Gold (WAG), which dates from September 1999, limited gold sales by its members (Europe, United States, Japan, Australia, the Bank for International Settlements and the International Monetary Fund) to less than 500 tonnes a year.^[19] In 2009, this agreement was extended for a further five years, but with a smaller annual sales limit of 400 tonnes.^[20] European central banks, such as the Bank of England and the Swiss National Bank, have been key sellers of gold over this period.^[21]

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.^[22] In early 2006, China, which only holds 1.3% of its reserves in gold,^[23] announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold, in line with other central banks. Chinese investors began pursuing investment in gold as an alternative to investment in the Euro after the beginning of the Eurozone crisis in 2011. China has since become the world’s top gold consumer as of 2013.^[24]

It is generally accepted that the price of gold is closely related to interest rates. As interest rates rise, the general tendency is for the gold price, which earns no interest, to fall, and vice versa. As a result, the gold price can be closely correlated to central banks^{[clarification needed]} via their monetary policy decisions on interest rates. For example, if market signals indicate the possibility of prolonged inflation, central banks may decide to raise interest rates, which could reduce the price of gold. But this does not always happen: after the European Central Bank raised its interest rate slightly on April 7, 2011, for the first time since 2008,^[25] the price of gold drove higher, and hit a new high one day later.^[26] Similarly, in August 2011 when interest rates in India were at their highest in two years, the gold prices peaked as well.^[27]

The price of gold can be influenced by a number of macroeconomic variables.^[28] Such variables include the price of oil, the use of quantitative easing, currency exchange rate movements and returns on equity markets

Four Reasons Why Gold Is A Bad Investment

My reasons for not seeing gold as an investment are straightforward. Unlike a bond, the metal pays no interest. There is no dividend. It may not protect you against the worst forms of inflation, which are often in health care. And there is no implicit guarantee that it will appreciate in value.

I know this describes most investments. But at least if you invest in a basket of major stocks, although not guaranteed, you are likely to receive dividend payments. If you buy gold bullion or coins, this is not the case.

And I also acknowledge that investors are wary about paper currencies. Sure, they are based on the faith and credit of a government, but U.S. Treasuries Securities have never been defaulted upon in anyone's lifetime. If that were to happen, the entire world financial system would collapse -- and gold wouldn't do you much good.

Gold's value, for the most part, is based on fear. Investors buy it when they think currencies are shaky or whole economies are wobbly. But ever since the disastrous crash of 2008 -- with Europe and the U.S. struggling to recover -- gold has been a poor investment.

Yet gold bugs peddle uncertainty. They assure you that you can make money because times are bad and are getting worse. Although you can always make an argument for that, the opposite is true. The U.S. and Europe are still recovering. Credit is tight, but not expensive. Corporations are still making profits.

This fear over the economic future fuels numerous gold scams. Dealers may be pushing coins, bullion or stocks in mining companies.

Brokers love these vehicles because they make money on commissions. The more products they sell, the richer they become, particularly when investor sentiment is skittish. They charge more for gold-based products than the actual price of the metal.

If you choose to invest in gold, be smart about it. Here are some buying guidelines from the Federal Trade Commission:

-- "If you are buying bullion coins or collectible coins, ask for the coin's `melt value' – the basic intrinsic bullion value of a coin if it were melted and sold. The melt value for virtually all bullion coins and collectible coins is widely available.

-- Get an independent appraisal of the specific gold product you're considering. The seller's appraisal might be inflated.

-- Consider additional costs. You may need to buy insurance, a safe deposit box, or rent offsite storage to safeguard bullion. These costs will cut into the investment potential of bullion.

-- Some sellers deliver bullion or bars to a secured facility rather than to a consumer. When you buy metals without taking delivery, take extra precautions to ensure that the metal exists, is of the quality described, and is properly insured.

-- Walk away from sales pitches that minimize risk or sales representatives who claim that risk disclosures are mere formalities. Reputable sales reps are upfront about the risk of particular investments. Always get a receipt for your transaction.

-- Refuse to "act now." Any sales pitch that urges you to buy immediately is a signal to walk away and hold on to your money."

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