All About Buying and Investing in Gold

History

Gold coins are one of the oldest forms of money. The first gold coins in history were coined by the Lydian king Croesus in about 560 BC, not long after the first silver coins were minted by king Pheidon of Argos in about 700 BC.

Gold coins then had a very long period as a primary form of money, only falling into disuse in the early 20th century. Most of the world stopped making gold coins as currency by 1933.

However, gold-colored coins (not made of real gold) have made a comeback in many currencies.

Collector Coins

Collector coins are not usually used for strictly investing in gold. With collector coins, you pay a premium for the collector value / rarity, above the value of the actual gold contained in the coin.

Many factors determine the value of a gold coin, such as its rarity, age, condition and the number originally minted. Gold coins coveted by collectors include the Aureus, Solidus and Spur Ryal.

In July 2002, a very rare $20 1933 Double Eagle gold coin sold for a record $7,590,020 at Sotheby’s, making it by far the most valuable coin ever sold to date. In early 1933, more than 445,000 Double Eagle coins had been struck by the U.S. Mint, but most of these were surrendered and melted down following Executive Order 6102. Only a few coins managed to survive.

In 2007 the Canadian Mint produced a 100 kg gold coin with a face value of $1,000,000, though the gold content was worth over $2 million at the time. It measures 50 cm in diameter and is 3 cm thick. It was intended as a one-off to promote a new line of Canadian Gold Maple Leaf coins, but after several interested buyers came forward the mint announced it would manufacture them as ordered and sell them for between $2.5 million and $3 million. As of May 3 2007 there were five confirmed orders.

Austria had previously produced a 37 cm diameter 31 kg gold coin worth €100,000 ($153,000).

In October 4, 2007, David Albanese (president of Albanese Rare Coins) stated that a $10 - 1804-dated Eagle coin (made for President Andrew Jackson as a diplomatic gift) was sold to an anonymous private collector for $5 million.

Bullion Coins

Opposed to collectors’ gold coins, gold bullion coins are popular amongst people who desire a “hedge” against inflation or a store of value.

South Africa introduced the Krugerrand in 1967 to cater to this market; this was the reason for its convenient and memorable gold content—exactly one troy ounce. It was the first modern, low premium (i.e. priced only slightly above the bullion value of the gold) bullion gold coin.

Bullion coins are also produced in fractions of an ounce – typically half ounce, quarter ounce, and one-tenth ounce. Bullion coins do not carry a meaningful face value, as their value is mainly dictated by their troy weight and the current market price of the precious metal. (If a face value is minted on the coin, it is done for legal or other reasons and it is nearly always significantly less than the actual value of the coin.)

Gold has an international currency code of XAU under ISO 4217.

Gold bullion coins usually come in 1 oz, 1/2 oz, 1/4 oz, 1/10 and 1/20 oz. sizes. Most countries have one design that remains constant each year; others have variations each year, and in most cases each coin is dated. A 1/10th oz bullion coin is about the same size as a U.S. dime. A 1 oz. gold bullion coin is about the size of a U.S. half dollar.

Gold bullion coins, many named after their design features, include:

• Krugerrand
• Canadian Gold Maple Leaf
• American Gold Eagle
• Australian Gold Nugget
• Austrian Philharmonic
• British Britannia
• Chinese Panda
• Gold Dinar
• Russian Chervonets
• Swiss Vreneli

Counterfeits

There are well made counterfeit gold coins in circulation. For example, the Saint-Gaudens Double Eagle omega counterfeit is infamous for its complexity; and has fooled many numismatics experts. It is a high relief business strike, and due to the extensive wear on the die, these coins were not made for many years.

For poor counterfeits, a good scale can usually tell if it’s counterfeit or not; however, there are many well made counterfeited ancient coins that not only use gold, but the correct amount as well.

The US $20 gold coin (”double eagle”) has raised lettering around its rim. If the coin is uncirculated, the letters will be flat on top. If slightly rounded, and the coin is uncirculated, it is a counterfeit. However, some counterfeits do not have this defect.

There are other counterfeit double eagles in which the gold and copper alloy was not thoroughly mixed. These counterfeits will have a slightly mottled appearance.

An old practice to test whether a gold coin was counterfeit was to bite down on it. Since pure gold is relatively soft any base metals mixed with the gold to lessen its value will also harden the coin, and so make it harder to bite on.

The majority of bullion counterfeits (of all types) are rare, and fairly easy to detect when comparing its weight, color and size to an authentic piece as the cost of reproducing any given coin precisely can exceed the market value of the original’s.

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Fundamental Analysis

Investors may base their investment decisions on fundamental analysis. These investors analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, 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.

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. 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.

Stock analyst Jim Jubak recently chose gold as one of his “stock” picks for the next 12 months giving it a price target of $870 per Troy ounce by July 2008.

Gold Versus Stocks

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. Since 1800, stocks have consistently gained value in comparison to gold due in part to the stability of the American political system.

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.”

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.

Recently 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.

Technical Analysis

As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically, this involves analyzing chart patterns, moving averages, market trends and/or the economic cycle in order to speculate on the future price.

Using Leverage

Bullish investors may choose to 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 LIBOR, which, as of April 2006, was the Japanese yen.

This technique is referred to as a “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 derivatives and unhedged gold mining company shares.

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Current Gold Spot Price and Historical Gold Charts - USD/oz

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Hoarding

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding.

Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, because almost all the gold ever mined still exists and is potentially able to come on to the market at the right price.

Given the huge quantity of above-ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.

Gold Production

According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.

About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

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 dishoarding.

Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.

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 percent of all above-ground gold as official gold reserves.

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. European central banks, such as the Bank of England and Swiss National Bank, have been key sellers of gold over this period.

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. In early 2006, China, which only holds 1.3% of its reserves in gold, 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.

Demand for Gold

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 coins.

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 President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.

Low or negative real interest rates

If the return on other asset classes is not adequately compensating for risk and inflation, the demand for gold increases. A prime example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

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.

Conspiracy Theories

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.

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