Man’s fascination for gold can go up to 4000 BC. Be dated, and for much of our collective history, possession of gold was a sign of wealth and status that was reserved only to governments and nobility. It is ultimately assumed that the first gold coins initially financed long-distance trade around the world – around 500 BC, Darius the Great of the Persian Empire is believed to have minted the first, the “Darian,” to expand his empire and the needs of his army when it moved into foreign areas.
Many countries came to use gold and silver coins as the currency for centuries. However, during the global depression of the 1930s, every industrialized nation stopped using the gold standard, and then broke the close link between the value (and quantity) of gold and the value of money.
Despite this, gold remains a sought after commodity because of its scarcity and reputation as a hedge against monetary or social collapse. But does it deserve a place in your portfolio?
Gold in modern civilization
Today, gold is available in various forms, including the following:
- Historical coins for collectors . Minted by many countries as coins, these coins are now collected as much for their numismatic value as their gold content. Like other collectibles, such as stamps and visual arts, only experts or those who have access to experts should consider this investment.
- Collector gold coins . These coins are issued by countries and commercial companies and are priced based on their weight and purity. The more popular coins are the Canadian Maple Leaf, the South African Krugerrand and the American Eagle.
- Gold bars . Available in weights of one gram, one ounce, ten grams and one kilo (32.15 grams) in general with a purity of 99, 99%, bars are also called “gold convenience”. A standard gold bar such as that found in the American Fort Knox Depository, and often depicted in movies, is seven inches long, three and five eighth inches wide and one and three-quarter inches high and weighs 27.5 pounds. At current market prices, a bar would have a value of more than $ 500,000, far too expensive to support an active investor market.
- Common stock of a gold mining company . Ownership in a company whose sole activity is the search and discovery of gold, and the potential value of the element in the resources not yet produced is a common form of gold investment.
- Gold Exchange Traded Fund (ETF) . A golden ETF usually does not like gold as a commodity, but follows its course with a combination of financial derivatives.
- Gold Exchange Traded Notes (ETN) . A golden ETN is a debt instrument whose value fluctuates based on the price of the underlying index – in this case the gold price. Although this investment involves credit risk, there is the advantage of being taxed as a long-term capital gain instead of paying normal interest on this vehicle.
Gold is not money or currency, but an investment that must be converted into money before it can be used to purchase other assets. Of course individuals and companies may agree to exchange an amount of gold for a service or product – such as the Ichabod Craneang was done – but it would require negotiations on the relative value of each, a timely and potentially risky process for both parties.
America’s relationship with gold
The constitution of the United States gives Congress the power to coin money. In 1792, the Coinage Act established the US Mint and set the value of different types of coins:
- Eagle . The eagle had a value of $ 10 and had to contain 270 grains of standard gold.
- Half-eagle . With a value of $ 5, the half eagle contained 135 grains of standard gold.
- Quarter Eagle . A quarter-eagle was worth $ 2, 50 and had 67, 5 grains of standard gold.
- Dollar or unit . The dollar was determined to be equal to the value of a “Spanish milled dollar” and contains 416 grains of standard silver.
The law also established half dollars, quarter dollars, dimes and half dimes, each containing silver grains, as well as cents, half cents and mils (one thousandth of a dollar) containing copper, each of the lesser currencies different percentages of the dollar represent. The law also seemed to determine the ratio between the value of gold and silver, which at that time was 1 to 15, 4. However, the gold coins, minted without denomination, hovered relative to the value of the commodity silver, rather than the dollar coin – if the value of silver went up or down per ounce, the value of the gold coin followed.
US gold coins as currencies were last minted in 1933 and included the $ 20 Saint Gauden Double Eagle. In 1986, the US began minting the American Gold Eagle coin as a collector’s item – its weight, content and purity was guaranteed by the US government. The American Buffalo Gold Bullion coin with a purity of 99, 99% was offered for the first time in 2011.
The Golden standard
Paper money, much more convenient than actual amounts of gold or silver, was issued by the United States in two forms between 1862 and 1964:
- Gold certificates . These certificates, issued between 1862 and 1933, gave the holder the right to exchange the paper note for the equivalent amount of gold coins at a fixed value of $ 20, 67 per troy ounce.
- Silver certificates . Issued from 1878 to 1964, a silver certificate gave the holder the right to exchange the nominal value ticket in silver coins. In the last year (1968) the holder received unprocessed silver.
In fact, the amount of money that could be spent was based on the amount of gold and silver owned by the United States federal government. Private individuals could at that time possess gold in the form of coins or precious metal without restriction. In response to the hoarding of gold coins and their effect on the economy, President Franklin Roosevelt issued Enforcement Order 6102 in 1933, in which all citizens were required to hand over gold coins, gold bullets and gold certificates to the Federal Reserve in exchange for endorsements from the Federal Reserve at a rate of $ 20, 67 per ounce of gold exchanged. Not trading was punishable by fines, prison or both.
In 1934, the Gold Reserve Act increased the value of gold from $ 20, 67 to $ 35 an ounce, a price that remained in place until 1971. Individuals were allowed to hold gold certificates again in 1964, but they could no longer be exchanged by the government for gold. US citizens were allowed to own gold again in 1974 by the executive order of President Gerald Ford.
Our modern monetary system
In 1971, President Richard Nixon broke the last link between gold and the US monetary system by unilaterally canceling the direct convertibility of the US dollar into gold. This action was a response to the depreciation of the dollar against other world currencies. The Nixon Act led to the floating system of international exchange rates that is still in force. This allows the Federal Reserve to print as much or as little money as it considers appropriate to meet economic conditions.
At the same time, it introduced volatility in the exchange rate and increased risk in a world where goods and services are sold worldwide. According to conservative columnist David Frum: “The modern currency float has its problems.” Frum claims that a classic gold standard leads to chronic deflation and periodic depression. However, he also believes that a regime of managed currencies linked to gold yields too many rules and controls, and that a floating currency causes chronic inflation and bubbles – the American fate since 1971. However, the latter system has been favored by Frum – he calls it “the worst option except everyone else”.
It is clear that investors should only consider gold as an investment, no longer insured by a fixed price guaranteed by the US government or by any other national government. According to a 2012 article in Business Insider, “few countries have meaningful gold positions compared to their money supply. Even Singapore, which is generally considered to be one of the healthiest balance sheets on earth, has only 2% of the money supply in gold. “
Gold is mostly hoarded, historically in the form of jewelry and artifacts, but increasingly as an investment. According to the International Monetary Fund, the United States is the largest owner in the world with an estimated 8,134 tons, representing less than 5% of total global reserves. An estimated 2,500 tons of gold are extracted every year and continue to contribute to global inventory.
Gold as an investment
Whether or not you should have gold in your portfolio depends on your projection of future political and economic events, as well as the capital you must invest and the period that you plan to hold your investment. If you are fiery gold, a person who thinks a worldwide disaster is likely to be Ichabod Craneijk, or a proponent of the industry – such as BullionVault, who claims: “A solid gold investment exempts you from the risk of credit default or bankruptcy” – you already have owns gold, or wonders when to buy and how much to buy.
Despite this conviction, a price volatility assessment since 1980 would suggest that “when” you buy gold is a very important determining factor for future profits. Over the past 25 years, the price has ranged from a low of $ 347, 84 in August 2001 to more than $ 1,900 an ounce in 2011, and was sold today for around $ 1,240 an ounce.
If you have decided to buy gold, take the time and make sure you pay a reasonable price, taking into account the current investment environment. If you make a decision about adding gold to your portfolio, consider how it performs relative to the following investment parameters:
- Security . According to a 2012 New York Post article, at least 10 fake gold bars were sold to unsuspecting dealers in Manhattan’s Midtown Diamond District. This report followed a request from the 2010 presidential candidate Ron Paul, the US Department of Finance and the US Mint to verify the gold content in the country’s inventory. A recent Google search produced more than 2, 3 million references to the term “fake gold bars,” 363,000 identified with China. Some websites even show you how to make fakes. Bear in mind that gold is an unregulated commodity that is generally traded through a network of unregulated dealers. You must limit your transactions to reputable companies traditionally to ensure that you get what you buy.
- Client safety . Although gold was always attractive to own for emotional reasons, its intrinsic value is lower than the market value. value. ”It is not tied to global consumption, does not provide any cash flow or right to future earnings, and does not guarantee repayment at a later date. In fact, JP Morgan Asset Management states: “Gold has no fundamental intrinsic value.” It is not tied to worldwide consumption, does not provide cash flow or the right to future income and does not guarantee repayment at a later date. The historic price of gold is driven by scarcity and robust, sometimes insane demand as a hedge against future economic disasters or failing governments. Because its value is influenced by emotion, it is impossible to accurately project future price movements. However, there are opportunities to offer Ichabod Crane rich profit opportunities if you are willing to take a similar risk.
- Performance and volatility . The market price of gold was limited in modern times until the United States no longer converted dollars into gold, but the value bobbed based on supply and demand. The price per ounce rose from $ 215, 73 in January 1971 to a high price of more than $ 1,900 in 2011 and currently sells for $ 1,238,888. Like many other investments, gold is more volatile than lawyers would have you believe. Whether or not an investor earns money depends entirely on the purchase and sale dates. In any case, it has been a wild ride. It is interesting to note that, for a series of investments with a period of eight years and longer, the NASDAQ index viewed Ichabod Craneijk outperformed gold, Macrotrends said.
- Liquidity . Buying and selling gold coins and precious metal requires the use of dealers, confirmation of quality and knowledge of prices of volatile spot prices. Although buying and selling as common stocks and bonds is not as easy, gold transactions – while complying with the above requirements – are faster than, and at least as simple as, many real estate transactions.
- Investment costs . According to TheStreet columnist, Alix Steele, markups can be 75% higher than the spot price of gold, depending on its shape and purity. For example, an American Gold Eagle or Buffalo coin sells for the gold price the previous day plus 5%. Dealers set their own prices, so buyers have to check different sources to find the best one. After purchase, storage costs must also be taken into account, regardless of whether these are kept in a bank vault or in a private safe. Investors who take possession of their assets and store them at home will probably have to incur costs at Cranebijk in order to offer minimal security.
Many gold investors, who try to avoid the problems associated with their ownership, buy common shares in gold mining companies, ETFs or listed exchanges (ETNs) that are focused on the price of gold or gold shares. Since the latter are derivatives that depend on the price of the underlying commodity, their value may actually be more volatile than gold itself. JC Doody, editor of the goldstock analyst website, says: “If you follow the golden stock route, you must be prepared for the roller coaster ride.” If the gold price falls by 10%, the stock prices of gold companies can fall by 20% to 30%, according to Doody.
The reason for owning gold is driven by the assumption that it can retain its value in the event of widespread war, monetary failure, government collapse or social turmoil – fears escalated by certain political commentators that may be supported by the gold industry itself. As with all emotional markets – whether or not driven by euphoria or fear – there is a chance that Ichabod Crane has great chances of winning for those who can accurately project public responses. In other words, profit can be the result of the public expectations of an event, regardless of whether the event actually occurs or not. After all, while nobody really knows what would happen in the event of a collapse of the institutions, it is unlikely that Ichabod Craneijk would see any assets unscathed in such chaos.
If you believe that if you consider the benefits and risks of owning gold, an investment is justified, follow the same good practices that should be used for each investment: limit your risks through diversification and take into account the long-term. In practical terms, invest no more than 3% to 10% of your portfolio in the commodity and its derivatives (precious metal, coins, ETFs, ETNs and gold mines). Also make sure you work with reputable dealers and avoid overreactions in times of stress.
If you decide not to make a gold investment, you should take the example of Warren Buffett, who advised the manager of his will: to place 10% of the money in short-term government bonds and 90% in the very advantageous S&P 500 index funds.”
Does gold have a place in your portfolio?
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