Gold prices are retracing from highs today after touching their highest level in more than seven years. The gold price hit a peak of $1,779 yesterday as investors started to diversify their bets. Five key factors are likely to push gold prices higher in the coming days.
Lets dive deeper.
Investors are largely risk-averse due to the threats of coronavirus second wave. New cases have started to surge. It was expected that there would be some spike in coronavirus cases as economies began to re-open. But what wasn’t priced in was that the situation would start to get out of control just as it did in Texas. New cases have soared 4.5%, and hospitals are close to their full capacity.
Australia has reported its largest one-day spike in coronavirus cases in nearly two months, and this has raised alarm bells of a possible second wave.
The UK has announced the re-opening of its pubs and restaurants, and travel restrictions are likely to be eased off from next month. Remember, the UK was one of the worst countries in terms of dealing with the Covid-19 crisis, and it has the third-largest casualty rate due to coronavirus. If appropriate measures are not taken and respected, we will probably see another coronavirus wave coming to the UK.
Of course, positive news on the Coronavirus vaccine or success in calming down the protests, and protecting the global economy from damage can keep the gold prices in check, and this may halt the sharp rise that I am expecting.
Donald Trump, the man who is known for escalating trade tensions, anchored trade tensions once again yesterday. Trump is weighing new tariffs on $3.1 billion of exports from the UK, Spain, France, and Germany. If tensions continue to rise on this issue and Trump doesn’t back off from his stance—which could be one of his tactics to show himself strong ahead of the US elections—investors are likely to steer away from riskier assets.
However, if for some reason, the trade tariffs are avoided, or investors do not see this a potential threat to global economic growth, gold bulls may not succeed in pushing the gold price higher.
China is not a country that is going to sit on its hand and let the Trump administration to bully it. The Phase-one US-China trade deal has become immensely fragile due to coronavirus. China has reduced its Agriculture and poultry from the US. There has been confusion about the US-China trade deal, and Trump has also talked about “decoupling” from China. In addition to this, China sees the US stance on Hong Kong as interference in its domestic affairs.
Traders do not like the US picking a fight with the second biggest economy of the world, and we have seen the evidence of this last year that jolted the US stock market.
If, for some reason, we see the relationship between the US and China getting back on track with no further threats to the US-China trade deal, we may not see a massive surge in the gold price.
The weekly jobless claims data continue to paint a very dull picture for the US labour market. Sadly, with the regional shutdown of stores in the US, it seems the minor recovery we have seen so far could be under a significant threat as well. In simple terms, the unemployment claims numbers are already ugly, and they are likely to become even worse because companies like Apple AAPL have begun the process of re-closing of their stores in US coronavirus hotspots.
The job market is the most important for the Federal Reserve, and Fed monetary policy is highly reflective of this. The Fed is determined to keep the interest rate lower for longer, and they are unlikely to increase the interest rates anytime soon. Another major central bank, the Bank of England, has provoked a new idea concerning interest rates, and will not increase the interest rates while the government balance sheet is mammoth. Andrew Bailey, the governor of the Bank of England, has talked about this, and, likely, the Fed will also pay attention to this notion.
The third earnings quarter is currently wrapping up. At the beginning of this quarter, there was some hope for improvement as the economies began to re-open. But the emergence of the second corona wave is likely to trigger another cautionary note from US companies, and investors are not going to like it. The US stock market rally that we have seen after the Covid-19 stock market crash could lose its momentum. Again, the risk-off mode is likely to spur interest in gold.
However, if the US corporates start to focus more on the positive side and for some miraculous reason their cash burn ratio goes down, we may not see much movement in the gold prices.
Since the beginning of modern history, gold has been an important means of storing value. In the past 200 years, the gold sector has remained relatively unchanged. However, there have been some interesting developments implying that change is just around the corner.
Over the years, gold has proven to be a suitable alternative to both fiat currency and cryptocurrency. The real question is, could it perhaps be both? In this article, we will be looking at three different trends and what this really means to the whole world of crypto: bitcoin, stablecoins and legislation.
Bitcoin could serve as a replacement for gold
During a recent Bitcoin summit in Israel, Nick Szabo stated that “Central banks will end up using bitcoin as a reserve currency.” In a Q&A session, Szabo also said, “I think it will be one of the many reserve currencies that can be used to underpin value on other things. There doesn’t have to be only one anymore.”
In an interview with MarketWatch, Inton said, “If cryptocurrency were to displace gold’s investment case, the implications for gold prices would be devastating. 40% of gold demand relates to investment, so a shift in investment from gold to cryptocurrency would be a seismic shock.” If this event were to come to pass, the repercussions would send shockwaves throughout the world’s global economy.
Felix Hartmann from the crypto hedge fund Hartmann Capital says, “Bitcoin bridges the gap between currency and a store of value asset. It maintains the speed and flexibility of fiat currency while remaining independent of central banks and governments and their macro-economic policies such as inflation.”
For a large number of new cryptocurrencies entering in 2018, most have proven to be inflated, volatile or unreliable. That’s why 2018 saw ICO’s on the downfall with stablecoins on the rise. This later became known as the “stablecoin frenzy,” mainly due to the benefits of cryptocurrency without the volatility.
Gold-pegged stablecoins emerged from the stablecoin frenzy. One good example of this is Novem who pegged their cryptocurrency to gold. According to a recent statement, the company has approximately 35 kg in LBMA-certified gold (Q1: 2019), stored securely by Loomis International. The amount of gold translates to almost $1,500,000 in collateral.
The aftermath of the stablecoin frenzy may lead to gold-pegged stablecoins flourishing—especially if the value is delivered to both consumers and businesses across the precious metal industry.
Gold and legislation
With a worldwide monetary crisis being just around the corner, Ron Paul who served US Congress for several terms from 1976 until 2013, wrote a formal paper, called “The Dollar Dilemma: Where to From Here?”
Paul said, “There are several major efforts being made to replace the fiat dollar with gold or cryptocurrencies, while other countries are making plans to challenge the dollar as the world’s reserve currency.” What this really means is that gold or cryptocurrencies could, in the very near future replace fiat.
However, this begs the question, what happens next? Crypto investors need “regulatory clarity.” According to a recent article by Cointelegraph, legislation clarity may indeed be underway. “Two United States congressmen introduced a bill in the House of Representatives on Dec. 20 that would exclude digital assets from being defined as securities.”
In the near future, it will be interesting to see what happens with gold, bitcoins and stablecoins. A lot of this hinges on the government’s aptitude to provide investors with regulatory clarity, stablecoin adoption, and will gold continue to be the reserve currency? Right now, it’s too early to say, but one thing remains clear—the financial markets are in for a change.
Is silver a good investment? Why should someone buy it?
It’s natural and even prudent for an investor to wonder if a particular asset is a good investment or not. That’s especially true for silver, since it’s such a small market and doesn’t carry the same gravitas as gold.
But at this point in history, there are compelling reasons to add physical silver to your investment portfolio (and only one is because the price will rise). Here the top 10 reasons why every investor should buy some silver bullion…
Silver may not be part of our currency, but it is still money. In fact, silver, along with gold, is the ultimate form of money, because it can’t be created out of thin air (and thus depreciated) like paper or digital forms. And by real money, we do mean physical silver—not ETFs or certificates or futures contracts. Those are paper investments, which don’t carry the same benefits you’ll find in this report.
Physical silver is a store of value, just like gold. Here’s why.
• No counterparty risk. If you hold physical silver, you don’t need another party to make good on a contract or promise. This is not the case with stocks or bonds or virtually any other investment.
• Never been defaulted on. If you own physical silver, you have no default risk. Not so for almost any other investment you make.
• Long-term use as money. A scan of monetary history shows that silver has been used in coinage more often than gold!
As Mike Maloney says in his best-seller, Guide to Investing in Gold and Silver, “Gold and silver have revalued themselves throughout the centuries and called on fiat paper to account for itself.”
Owning some physical silver provides you with a real asset that has served as money for literally thousands of years.
Of all the investments you own, how many can you hold in your hand?
In a world of paper profits, digital trading, and currency creation, physical silver stands in contrast as one of few assets that you can carry in your pocket anywhere you go, even another country. And it can be as private and confidential as you want. Physical silver is also a tangible hedge against all forms of hacking and cybercrime. There’s no “erasing” a silver Eagle coin, for example, but that can certainly happen to a digital asset:
What if I said you could buy a hard asset at 1/70th the price of gold—and it would protect you just as well against crisis?
That’s what you get with silver! It is much more affordable for the average investor, and yet as a precious metal will help maintain your standard of living as good as gold. If you can’t afford to buy a full ounce of gold, silver can be your ticket to holding some precious metals. This is also true for gift-giving. Don’t want to spend over a $1,000 on a present but would like to give a hard asset? Silver just made it more affordable.
Silver isn’t just cheaper to buy, but can be more practical when you need to sell. Maybe someday you don’t want to sell a full ounce of gold to meet a small financial need. Enter silver. Since it frequently comes in smaller denominations than gold, you can sell only what you want or need at the time.
Every investor should have some silver around for this very reason.
Keep in mind that silver coins and bars bullion can be sold virtually anywhere in the world.
Silver is a very small market—so small, in fact, that a little money moving into or out of the industry can impact the price to a much greater degree than other assets (including gold). This greater volatility means that in bear markets, silver falls more than gold. But in bull markets, silver will soar much further and faster than gold.
Here are couple good examples… check out how much more silver gained than gold in the two biggest precious metals bull markets in the modern era:
|Gain from 1970 low to 1980 high||Gain from 2008 low to 2011 high|
You might say silver is gold on steroids!
We can expect this outperformance to repeat in the next bull market, too, because the silver industry remains tiny.
Governments and other institutions have traditionally held inventories of silver. But today, most governments no longer hold stockpiles of the metal. In fact, the only countries that warehouse silver are the US, India, and Mexico.
Look what’s happened to those inventories since 1996.
A big reason governments don’t hold a lot of silver is because coinage is no longer made from the precious metal. But as you’ll see, silver is used in industry to a much greater degree now… so if future industrial needs are difficult to meet, governments will be ill-equipped to support those needs.
Believe it or not, you don’t go one day without using a product that contains silver.
It’s used in nearly every major industry, from electronics and medical applications to batteries and solar panels. Silver is everywhere, whether you see it or not. As Mike says in his book, “Of all the elements, silver is the indispensable metal. It is the most electrically conductive, thermally conductive, and reflective. Modern life, as we know it, would not exist without silver.” Due to these rare characteristics, the number of industrial applications for silver has skyrocketed. In fact, industry now gobbles up more than half of all silver demand.
Silver is used in a wide number of industries and products, and many of those uses are growing. Here’s a few examples…
• A cell phone contains about one-third of a gram of silver, and cell phone use continues to climb relentlessly worldwide. Gartner, a leading information technology research and advisory company, estimates a total of 5.75 billion cell phones will be purchased between 2017 and 2019. That means 1.916 billion grams of silver, or 57.49 million ounces, will be needed for this use alone!
• The self-heating windshield in your new Volkswagen will have an ultra-thin invisible layer of silver instead of those tiny wires. They’ll even have filaments at the bottom of the windshield to heat the wipers so they don’t freeze to the glass.
• The Silver Institute estimates that silver use in photovoltaic cells (the main constituents of solar panels) will be a whopping 75% greater in 2018 than it was just 3 years earlier.
• Another common industrial use for silver is as a catalyst for the production of ethylene oxide (an important precursor in the production of plastics and chemicals). The Silver Institute projects that due to growth in this industry, 32% more silver will be needed by 2018 than what was used in 2015.
There are a lot more examples like this, but the bottom line is that due to its unique characteristics, industrial uses for silver continue to expand, which means we can reasonably expect this source of demand to remain robust. But that’s not the whole story… unlike gold, most industrial silver is consumed or destroyed during the fabrication process. It’s just not economic to recover every tiny flake of silver from millions of discarded products. As a result, that silver is gone for good, and limits the amount of supply that can return to the market through recycling.
So not only will the ongoing growth in industrial uses keep silver demand strong, millions of ounces cannot be reused. That might be a problem, because…
As you might be aware, the silver price crashed after peaking in 2011. Over the next five years it fell a whopping 72.1%. As a result, miners had to scramble to cut costs to turn a profit. One of the areas cut dramatically was exploration and development of new silver mines.
It doesn’t take a rocket scientist to understand that if you spend less time and money looking for silver that you will find less silver. That drought in exploration and development is starting to take effect.
Low prices have affected how much scrap metal is available, too.
All of this is starting to have an impact on total supply.
Silver supply has fallen three consecutive years, the first time since 1991-1993.
As much as two-thirds of silver mine supply comes as a byproduct from base metal operations (copper and zinc, for example). But these other sources of supply will clearly have an impact on the availability of new metal coming to the marketplace. These realities have set the stage for a peak in silver supply. If demand stays at current levels, it will be difficult for everyone who wants silver to get as much as they need. And don’t look now, but…
Global demand for silver is growing. Virtually all major government mints have seen record levels of sales, with most already operating at peak production. Surging demand is nowhere more evident than China and India. These two behemoth markets have long histories of cultural affinity toward precious metals. And with their populations growing (the opposite of what is happening in the West), their tremendous appetite will continue.
Here’s a couple good examples… check out the growth in silver demand in China (for all uses):
And look at the growth of silver jewelry in India:
This kind of demand doesn’t happen in a vacuum. Sooner or later there will be consequences when surging demand meets crimped supply—and those consequences are all positive if you own the metal.
Last, the gold/silver ratio (the price of gold divided by the price of silver) can give clues about which metal might be the better buy at any given time. Especially when the ratio reaches an extreme…
The gold-to-silver ratio averaged 47:1 during the 20th century. It’s averaged about 61:1 in the 21st century. So a ratio at or above 70 is in outlier territory and thus makes silver a good buy relative to the price of gold. You can see that the ratio sank to almost 30 at the peak of the bull market in 2011. It reached as low as 17 in early 1980. This compression in the ratio shows just how much silver can outperform its cousin gold. It also confirms it is undervalued compared to gold.
• Add all up the reasons and silver just might be the buying opportunity of the decade.
It’s hard to find an asset with a greater distortion between price and fundamentals. Not only is it a good hedge against crisis, the price will be forced up by a perfect storm of fundamental factors.
Original – By Jeff Clark, Senior Analyst, GoldSilver
It’s gold’s time to shine again. The metal price is up 10% this year and 25% since early 2019. Where it goes to from here is the subject of raucous debate, but the consensus is that it will go higher. Possibly much higher.
The bursting of every asset bubble in-sight, from equities to bonds and real estate, has investors scrambling for cover, and gold is seen as one of the few places of safety at times like these.
Gold shares are one way of participating in this bonanza, but investing in physical gold is for many more desirable – though it requires jumping through a few hoops.
SA Bullion has been around since 2005 and is headed by Hilton Davies, a former investment manager at Allan Gray. Davies set up Allan Gray Namibia and was instrumental in setting up Allan Gray unit trusts before venturing off on his own. “I saw the huge potential for gold as a long term store of value,” he says.
The phones are ringing hot at SA Bullion, as South Africans worried by the global outbreak of Covid-19 try to get their hands on physical gold. The lockdown has put a temporary brake on SA Bullion’s ability to trade, but still, the inquiries are streaming in.
The company offers two ways to get invested in gold:
“In SA we deal exclusively in the bullion Krugerrand, not in proof Krugerrands, which trades at a very high premium to the bullion price and makes little sense to us,” says Davies. “At the end of the day, the only thing of value is the metal content and purity, hence we stick with bullion Krugerrands.”
The company trades more than R1 billion in gold a year and offers vaulting services in Dubai, Zurich and Johannesburg.
Krugerrands are legal tender (so attract no VAT)
The advantage of owning Krugerrands is they are classified as legal tender in SA and are therefore not subject to VAT. The same is not true of bullion bars, whether minted or not, which attract VAT at 15%.
SA Bullion investment clients who want their gold vaulted in South Africa, acquire their Krugerrands at a premium of 3% to the prevailing metal price. They get charged 1.5% a year and this fee covers vaulting, insurance and management.
How can South Africans buy physical gold?
You can contact SA Bullion via your financial advisor (it is a licensed investment management firm) or approach the company directly at its website www.sabullion.co.za.
After the paperwork is done and the cash transferred to SA Bullion, new bullion Krugerrands are purchased on your behalf from Prestige Bullion (a joint venture between SA Reserve Bank (Sarb) and Rand Refinery). Your gold is then stored at Rand Refinery in terms of a contract with SA Bullion. To exit, you can have SA Bullion sell your Krugerrands back to the Sarb or have your Krugerrands delivered to you.
You can also sign up for a monthly debit order (from as low as R500 per month) much like any unit trust. SA Bullion manages a Nedbank account for every client and their system interrogates the client account balances every day. When you have sufficient funds for one Krugerrand, the system automatically puts your funds into the buy-orders for that day.
For investors seeking a managed investment in physical gold offshore, the minimum capital outlay is normally $50,000, though SA Bullion has reduced this to $25,000 until end-May. You can invest in Krugerrands, 100 gram Minted Bars or 1 kilogram Cast Bars. For offshore investments, there is no VAT on bars. For your foreign gold account, you get charged 1% a year and this fee covers vaulting, insurance and management.
What if I want my gold stored overseas?
Once your paperwork is done and your cash is ready, SA Bullion arranges for the funds to be transferred to its offshore company in Mauritius, which then does an export trade with Rand Refinery in Johannesburg. The gold is then air-freighted to your vault selection – either Dubai or Zurich. Following the touchdown, the gold is walked through a customs clearance process and then placed in the care of the world’s leading vaulting service provider. Contractually, SA Bullion may not reveal the names or locations of the vault service provider.
When you wish to exit from your investment SA Bullion sells your gold to a foreign bullion refinery or has it delivered to you anywhere in the world (but your export may not be re-routed to a SADC country).
Until now SA Bullion has sourced its gold exclusively from Rand Refinery but plans to source additional gold from an overseas refinery as of April 2020.
What are the chances of governments confiscating gold?
The chances may seem remote that governments will seize gold, but it has happened before in times of crisis. So it shouldn’t be entirely discounted.
One of the greatest heists in history was pulled off in 1933 in the US by then-President Franklin Delano Roosevelt who made it a criminal offence for US citizens to own or trade gold anywhere in the world. Those in possession of gold were forced to swap it for paper money at the price of $20.67 an ounce. A year later Roosevelt introduced the Gold Reserve Act, vesting all gold and gold certificates with the US Treasury, and immediately thereafter changed the statutory price of gold to $35 an ounce – netting an immediate profit for itself of 67%.
“We think the chances of something like this happening again are remote, but it is a question we get asked,” says Davies. “There would be serious consequences for any government attempting to do this again, even in a time of crisis, as it would immediately void property rights and attach pariah status to the government of the day.”
Hence, details of the vaulting services offered around the world are a closely guarded secret.
What are the prospects for gold?
Gold has been in a five-year bull market, but the best may be yet to come. The worldwide outbreak of COVID-19 has materially altered the outlook for one of the few remaining refuges against fiat currency debasement. Central banks around the world are firing up the printing presses to mitigate the catastrophic effects of the global economic shutdown, triggering renewed interest in physical gold. While the rand has lost more than 20% of its value so far this year, gold has held its value in the face of a crashing equity prices and volatile currencies. The shutdown of several of the largest gold mines in the world will constrict supply over the coming months, while demand is expected to ramp upwards over the course of 2020.
In this 21st century gold has gone up in Rands at approximately 15% per annum. Davies does not see this changing.
Imagine yourself sitting in a stream swirling water in a pan, desperately hoping to see a small yellow glint of gold and dreaming of striking it rich. America has come a long way since the early 1850s, but gold still holds a prominent place in our global economy today. Here’s a comprehensive introduction to gold, from why it’s valuable and how we obtain it to how to invest in it, the risks and benefits of each approach, and advice on where beginners should start.
In ancient times, gold’s malleability and luster led to its use in jewelry and early coins. It was also hard to dig gold out of the ground — and the more difficult something is to obtain, the higher it is valued.
Over time, humans began using the precious metal as a way to facilitate trade and accumulate and store wealth. In fact, early paper currencies were generally backed by gold, with every printed bill corresponding to an amount of gold held in a vault somewhere for which it could, technically, be exchanged (this rarely happened). This approach to paper money lasted well into the 20th century. Nowadays, modern currencies are largely fiat currencies, so the link between gold and paper money has long been broken. However, people still love the yellow metal.
The largest demand industry by far is jewelry, which accounts for around 50% of gold demand. Another 40% comes from direct physical investment in gold, including that used to create coins, bullion, medals, and gold bars. (Bullion is a gold bar or coin stamped with the amount of gold it contains and the gold’s purity. It is different than numismatic coins, collectibles that trade based on demand for the specific type of coin rather than its gold content.)
Investors in physical gold include individuals, central banks, and, more recently, exchange-traded funds that purchase gold on behalf of others. Gold is often viewed as a “safe-haven” investment. If paper money were to suddenly become worthless, the world would have to fall back on something of value to facilitate trade. This is one of the reasons that investors tend to push up the price of gold when financial markets are volatile.
Since gold is a good conductor of electricity, the remaining demand for gold comes from industry, for use in things such as dentistry, heat shields, and tech gadgets.
The demand for jewelry is fairly constant, though economic downturns do, obviously, lead to some temporary reductions in demand from this industry. The demand from investors, including central banks, however, tends to inversely track the economy and investor sentiment. When investors are worried about the economy, they often buy gold, and based on the increase in demand, push its price higher. You can keep track of gold’s ups and downs at the website of the World Gold Council, an industry trade group backed by some of the largest gold miners in the world.
Gold is actually quite plentiful in nature but is difficult to extract. For example, seawater contains gold — but in such small quantities it would cost more to extract than the gold would be worth. So there is a big difference between the availability of gold and how much gold there is in the world. The World Gold Council estimates that there are about 190,000 metric tons of gold above ground being used today and roughly 54,000 metric tons of gold that can be economically extracted from the Earth using current technology. Advances in extraction methods or materially higher gold prices could shift that number. Gold has been discovered near undersea thermal vents in quantities that suggest it might be worth extracting if prices rose high enough.
Although panning for gold was a common practice during the California Gold Rush, nowadays it is mined from the ground. While gold can be found by itself, it’s far more commonly found along with other metals, including silver and copper. Thus, a miner may actually produce gold as a by-product of its other mining efforts.
Miners begin by finding a place where they believe gold is located in large enough quantities that it can be economically obtained. Then local governments and agencies have to grant the company permission to build and operate a mine. Developing a mine is a dangerous, expensive, and time-consuming process with little to no economic return until the mine is finally operational — which often takes a decade or more from start to finish.
The answer depends partly on how you invest in gold, but a quick look at gold prices relative to stock prices during the bear market of the 2007-2009 recession provides a telling example.
Between Nov. 30, 2007, and June 1, 2009, the S&P 500 index fell 36%. The price of gold, on the other hand, rose 25%. This is the most recent example of a material and prolonged stock downturn, but it’s also a particularly dramatic one because, at the time, there were very real concerns about the viability of the global financial system.
When capital markets are in turmoil, gold often performs relatively well as investors seek out safe-haven investments.
Here are all the ways you can invest in gold, from owning the actual metal to investing in companies that finance gold miners.
The markups in the jewelry industry make this a bad option for investing in gold. Once you’ve bought it, its resale value is likely to fall materially. This also assumes you’re talking about gold jewelry of at least 10 karat. (Pure gold is 24 karat.) Extremely expensive jewelry may hold its value, but more because it is a collector’s item than because of its gold content.
These are the best option for owning physical gold. However, there are markups to consider. The money it takes to turn raw gold into a coin is often passed on to the end customer. Also, most coin dealers will add a markup to their prices to compensate them for acting as middlemen. Perhaps the best option for most investors looking to own physical gold is to buy gold bullion directly from the U.S. Mint, so you know you are dealing with a reputable dealer.
Then you have to store the gold you’ve purchased. That could mean renting a safe deposit box from the local bank, where you could end up paying an ongoing cost for storage. Selling, meanwhile, can be difficult since you have to bring your gold to a dealer, who may offer you a price that’s below the current spot price.
Another way to get direct exposure to gold without physically owning it, gold certificates are notes issued by a company that owns gold. These notes are usually for unallocated gold, meaning there’s no specific gold associated with the certificate, but the company says it has enough to back all outstanding certificates. You can buy allocated gold certificates, but the costs are higher. The big problem here is that the certificates are really only as good as the company backing them, sort of like banks before FDIC insurance was created. This is why one of the most desirable options for gold certificates is the Perth Mint, which is backed by the government of Western Australia. That said, if you’re going to simply buy a paper representation of gold, you might want to consider exchange-traded funds instead.
If you don’t particularly care about holding the gold you own but want direct exposure to the metal, then an exchange-traded fund (ETF) like SPDR Gold Shares is probably the way to go. This fund directly purchases gold on behalf of its shareholders. You’ll likely have to pay a commission to trade an ETF, and there will be a management fee (SPDR Gold Share’s expense ratio is 0.40%), but you’ll benefit from a liquid asset that invests directly in gold coins, bullion, and bars.
Another way to own gold indirectly, futures contracts are a highly leveraged and risky choice that is inappropriate for beginners. Even experienced investors should think twice here. Essentially, a futures contract is an agreement between a buyer and a seller to exchange a specified amount of gold at a specified future date and price. As gold prices move up and down, the value of the contract fluctuates, with the accounts of the seller and buyer adjusted accordingly. Futures contracts are generally traded on exchanges, so you’d need to talk to your broker to see if it supports them.
The biggest problem: Futures contracts are usually bought with only a small fraction of the total contract cost. For example, an investor might only have to put down 20% of the full cost of the gold controlled by the contract. This creates leverage, which increases an investor’s potential gains — and losses. And since contracts have specific end dates, you can’t simply hold on to a losing position and hope it rebounds. Futures contracts are a complex and time-consuming investment that can materially amplify gains and losses. Although they are an option, they are high-risk and not recommended for beginners.
One major issue with a direct investment in gold is that there’s no growth potential. An ounce of gold today will be the same ounce of gold 100 years from now. That’s one of the key reasons famed investor Warren Buffett doesn’t like gold — it is, essentially, an unproductive asset.
This is why some investors turn to mining stocks. Their prices tend to follow the prices of the commodities on which they focus; however, because miners are running businesses that can expand over time, investors can benefit from increasing production. This can provide upside that owning physical gold never will.
However, running a business also comes with the accompanying risks. Mines don’t always produce as much gold as expected, workers sometimes go on strike, and disasters like a mine collapse or deadly gas leak can halt production and even cost lives. All in all, gold miners can perform better or worse than gold — depending on what’s going on at that particular miner.
In addition, most gold miners produce more than just gold. That’s a function of the way gold is found in nature, as well as diversification decisions on the part of the mining company’s management. If you’re looking for a diversified investment in precious and semiprecious metals, then a miner that produces more than just gold could be seen as a net positive. However, if what you really want is pure gold exposure, every ounce of a different metal that a miner pulls from the ground simply dilutes your gold exposure.
Potential investors should pay close attention to a company’s mining costs, existing mine portfolio, and expansion opportunities at both existing and new assets when deciding on which gold mining stocks to buy.
If you’re looking for a single investment that provides broadly diversified exposure to gold miners, then low-cost index-based ETFs like VanEck Vectors Gold Miners ETF and VanEck Vectors Junior Gold Miners ETF are a good option. Both also have exposure to other metals, but the latter focuses on smaller miners; their expense ratios are 0.53% and 0.54%, respectively.
As you research gold ETFs, look closely at the index being tracked, paying particular attention to how it is constructed, the weighting approach, and when and how it gets rebalanced. All are important pieces of information that are easy to overlook when you assume that a simple ETF name will translate into a simple investment approach.
Investors who prefer the idea of owning mining stocks over direct gold exposure can effectively own a portfolio of miners by investing in a mutual fund. This saves the legwork of researching the various mining options and is a simple way to create a diversified portfolio of mining stocks with a single investment. There are a lot of options here, with most major mutual fund houses offering open-end funds that invest in gold miners, such as the Fidelity Select Gold Portfolio and Vanguard Precious Metals Fund.
However, as the Vanguard fund’s name implies, you are likely to find a fund’s portfolio contains exposure to miners that deal with precious, semiprecious, and base metals other than gold. That’s not materially different from owning mining stocks directly, but you should keep this factor in mind, because not all fund names make this clear. (For example, the Fidelity Select Gold Portfolio also invests in companies that mine silver and other precious metals.)
Fees for actively managed funds, meanwhile, can be materially higher than those of index-based products. You’ll want to read a fund’s prospectus to get a better handle on its investing approach, whether it is actively managed or a passive index fund, and its cost structure. Note that expense ratios can vary greatly between funds.
Also, when you buy shares of an actively managed mutual fund, you are trusting that the fund managers can invest profitably on your behalf. That doesn’t always work out as planned.
For most investors, buying stock in a streaming and royalty company is probably the best all-around option for investing in gold. These companies provide miners with cash up front for the right to buy gold and other metals from specific mines at reduced rates in the future. They are like specialty finance companies that get paid in gold, allowing them to avoid many of the headaches and risks associated with running a mine.
Benefits of such companies includes widely diversified portfolios, contractually built-in low prices that lead to wide margins in good years and bad, and exposure to gold price changes (since streaming companies make money by selling the gold they buy from the miners). That said, none of the major streaming companies has a pure gold portfolio, with silver the most common added exposure. (Franco-Nevada, the largest streaming and royalty company, also has exposure to oil and gas drilling.) So you’ll need to do a little homework to fully understand what commodity exposures you’ll get from your investment. And while streaming companies avoid many of the risks of running a mine, they don’t completely sidestep them: If a mine isn’t producing any gold, there’s nothing for a streaming company to buy.
The built-in wide margins that result from the streaming approach provide an important buffer for these businesses. That has allowed the profitability of streamers to hold up better than miners’ when gold prices are falling. This is the key factor that gives streaming companies an edge as an investment. They provide exposure to gold, they offer growth potential via the investment in new mines, and their wide margins through the cycle provide some downside protection when gold prices fall. That combination is hard to beat.
There’s no perfect way to own gold: Each option comes with trade-offs. That said, probably the best strategy for most people is to buy stock in streaming and royalty companies. However, what to invest in is just one piece of the puzzle: There are other factors that you need to consider.
Gold can be a volatile investment, so you shouldn’t put a large amount of your assets into it — it’s best to keep it to less than 10% of your overall stock portfolio. The real benefit, for new and experienced investors alike, comes from the diversification that gold can offer. Once you’ve built your gold position, make sure to periodically balance your portfolio so that your relative exposure to it remains the same.
It’s best to buy small amounts over time. When gold prices are high, the price of gold-related stocks rises as well. That can mean lackluster returns in the near term, but it doesn’t diminish the benefit over the long term of holding gold to diversify your portfolio. By buying a little at a time, you can dollar-cost average into the position.
As with any investment, there’s no one-size-fits-all answer for how you should invest in gold. But armed with the knowledge of how the gold industry works, what each type of investment entails, and what to consider when weighing your options, you can make the decision that’s right for you.
I don’t know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations. Together, they’ve tripled the stock market’s return over the last 17 years.* And while timing isn’t everything, the history of Tom and David’s stock picks shows that it pays to get in early on their ideas.
By – Reuben Gregg Brewer(TMFReubenGBrewer)
New gold bullion buyers often begin by wondering how they might be able to buy gold at spot as well where can you buy gold bullion at the spot price.
We begin first and foremost, with a word of caution. Please be careful in your buying gold bullion at spot price endeavors.
Many offers for gold at spot price or even for gold under spot price are often the realm of conmen, counterfeits, and dishonesty.
Here we’ll teach you how to buy gold at or near spot safely via proper due diligence and knowing the counterparty is trusted and in fact, delivers on their word or promises.
To begin the 21st Century, we experienced about 10-years straight of consistently higher gold prices year after year (from 2001 until later 2011). The still standing nominal price record for fiat US dollar gold price’s was touched near $1,900 oz USD in August 2011.
Since that time, the price of gold has consolidated to as low as about $1,050 oz USD in late 2015 but has since rebounded to fiat USD prices over $1,500 oz in the past few months.
Below is an over 200-year chart of gold’s US dollar price.
Note in this long term gold price chart, the US dollar gold price per troy ounce started moving exponentially right after the 1971 Nixon Shock which severed the final underlying ties between gold bullion and now every government currency in circulation including the fully fiat US dollar.
Due to lower price premiums currently in the gold bullion industry, various high volume gold bullion dealers (who work on razor-thin profit margins), have at times offered one time buy gold at spot price opportunities for new customers. The buy gold at spot price offer is done as a ‘loss leader’ mostly to encourage investors to become new customers and to get on their email list for future product promotions.
After all, there is no one easier to sell gold bullion to, then someone who has already bought gold bullion.
Others might even get some cheap debt-fueled sales subsidies by large corporations who may be trying to bolster their top-line revenues and perhaps further gain bullion trading market shares on their platforms.
Physical gold bullion dealers make little to no money in these gold at or next to spot price offers. Most often it is a loss in terms of overall costs associated with such transactions, yet some gold bullion dealers do so in the effort to gain new customers to market products to. They are ultimately hoping to bolster their bullion business growth for the long term.
We strongly suggest that on any gold bullion at spot price deal you may come across, that you perform proper gold buying due diligence on the gold-selling counterparty.
Stick with established high volume gold bullion selling businesses that get highly ranked on hard-to-rig gold dealer review websites.
Pay careful attention to rankings and review volumes. Any gold dealer with poor or mediocre reviews is not worth risking your hard-earned capital.
Also, pay special attention to the kinds of reviews that you read. It is certainly not out of the realm of possibilities that the reviews you find are fake or not genuine.
Typically the only individuals who buy physical gold bullion below spot price are gold scrap refineries, we buy gold stores, and gold bullion dealers who may bid or offer a price slightly lower than the fluctuating gold spot price. Often for gold bullion bars, the bid price given to purchase gold bars from customers is at or just below the gold spot price. Conversely, popular modern gold bullion coins typically yield bid prices at or even slightly above the gold spot price).
Currently, for new .999 fine physical gold bullion products, one should never accept a bid or offer price below 98% of the fluctuating gold spot price.
If an individual tries to buy gold below the spot price, the chances are high that you will run into counterfeit gold bars or coin conmen or con women on websites like Craigslist or unproven gold bullion sellers on eBay.
Be very careful as gold looking Chinese counterfeit products are a real issue in our industry and are used daily to try and take advantage of unknowing or ‘lowest price at all cost’ would be gold bullion buyers.
More often than not, these counterfeit gold frauds go undetected for years or even go unreported due to the embarrassment it may cause the person who fell for the scam.
For every “I tried to buy gold below spot price” victim and gold fraud story covered on the news or in the media. We could probably multiply that figure by 10X or more in the amounts of times this similar story has gone unreported.
Often those who get low or unbelievable gold price conned, don’t even tell their loved ones due to intense feelings of regret and humiliation.
The reason for this is rather simple.
Physical gold bullion’s supply chain calls for physical gold bullion products to be sold above the gold spot price for various parts of this industry and value-added-chain, to remain solvent, and out of bankruptcy proceedings.
If selling gold bullion in large volumes at the gold spot price was a legitimate business model, people in business would have done so long ago.
Take a look at how gold bullion typically gets to the end-user below.
Star explosions produce precious metal elements
Gold laced asteroids crossed the universe, formed and collided with Earth
We, humans, mine Gold + Recover Gold Scrap ( mostly below gold spot prices )
Gold Refiners purify physical gold (often selling .999 gold at the gold spot price to large gold mints/gold dealers)
Gold Bullion Mints create bullion products ( bars and coins then are sold above spot )
Gold Bullion Dealers like us here at SD Bullion, we trade gold bullion products
Customers buy, own, sell, trade their physical gold (above, at, or slightly below the prevailing gold spot price)
Unless you own a physical gold bullion or gold scrap related business in this supply chain illustrated above, it will be risky and difficult ever to procure physical gold below fluctuating gold spot prices.
Paramount to any gold bullion purchasing is that you indeed get what you have paid to receive. There are decades of allegations and frauds which prove this is often not the case for some would-be gold buyers and or sellers.
Reputable high volume gold bullion businesses typically operate on super slim profit margins ranging between mere basis points (100ths of 1%) to low percentage points on various trades.
Gold dealers are not in business to go bankrupt. Many former gold dealers have gone bust over the years due to sheer incompetence or worse, avarice and rationalizations along the way to bankruptcy.
If you are attempting to buy gold at the gold spot price, please make well sure the counterparty is indeed trustworthy, solvent, and reliable.
If you found this content informative, be sure to pick up our 100% free SD Bullion Guide before you go.
Within that document, you will find many helpful tips and related information which may help you become a more successful long term bullion buyer and potential seller someday.
Thanks for visiting us here at SD Bullion.
James AndersonContent Director
Learn more about gold and how you can start investing today.
Global stocks crashed in 2020 as a result of the unexpected coronavirus pandemic, and the historic volatility has led investors all over the world to seek safe places to put their money.
For centuries, gold has been a popular store of wealth. In turbulent times, you might notice people talking about gold as an investment. After the initial panic subsides, you often see the price of gold rising while other stocks are falling.
If you’re interested in investing in gold, there are three main routes to do so:
One option is to invest in gold mining firms. You can find some of the largest firms listed on the S&P 500, including Newmont Mining (NEM) and Freeport McMoRan (FCX). Many other miners — the smaller firms are call junior miners — are also widely available through normal brokerage accounts. Through investing in mining stocks, you’re directly linking your capital to the success of these companies, and the changing value and price of gold.
While heavily correlated, the performance of gold mining stocks will not perfectly match the price of gold. Unlike the resource itself, companies are subject to a number of external factors such as employees going on strike, geo-political implications for the area, natural disasters and business decisions. In addition, because the cost of mining is often high, there’s usually a price point where increases in the gold price can influence the profit margins for gold miners exponentially rather than linearly. For instance, if the cost of mining is $1,000 per ounce, then a 13% increase in the price of gold from $1,150 to $1,300 actually represents a 100% jump in profits for the gold miner.
ETFs are another option worth considering. ETFs give access to a whole load of assets without having to put all of your money into one or two firms.
Simply, ETFs allow investors to minimize risk while taking advantage of the performance and general popularity of a particular sector — in this case, gold.
There are several gold-based ETFs to choose from, covering a whole host of different companies within the industry. There are mining companies, exploration companies, as well as the actual asset itself. Gold ETFs are a pretty good choice for those who are new to investing, as well as those looking to secure their portfolio.
For some people, part of the appeal of gold is being able to hold it. If you’re one of those people, then the good news is that buying solid gold has never been easier. While you can buy gold directly from the US Mint, most investors do business with a local dealer or reputable online broker.
Gold is available in a variety of coins, ingots and bars as small as half an ounce and as large as 400 ounces. While the US Mint has produced numerous collectible gold coins in different themes, the standard gold bullion coin is called the Gold American Eagle. Other common gold coins include Canada’s Gold Maple Leaf, South Africa’s Gold Krugerrand, China’s Gold Panda and Australia’s Gold Kangaroo.
Gold bars generally range in size from 1/10 of an ounce to 1 kg (2.2 pounds), but there are also bars up to 500 ounces available. However, remember that precious metals use troy ounces and one troy ounce equals 31.1 grams.
There are two types of gold bars: cast bars and minted bars. Cast bars are produced by pouring molten gold into an ingot mold, while minted gold bars are manufactured via a minting or stamping process. Cast bars are cheaper to produce, but minted bars look better and are generally easier to sell.
Mints around the world also produce gold bullion coins. Typically smaller than bars and ingots, they’re generally considered to be a more convenient option for many investors. Not only are they cheaper to buy, but they also make it easier to liquidate a small portion of your investment when you need cash. Coins contain between 1/10 of an ounce and 1 ounce of pure gold.
These coins also have a nominal monetary value and can be accepted as legal tender in the country where they’re made.
Once you’ve purchased your gold, you’ll also need to find a safe place to store it. There are several options to consider, including the following:
There are many reasons people view gold a safe haven for investors. For example:
A safe haven investment is typically stable in times of market volatility. A safe haven is also useful for investors looking to diversify their portfolio, decreasing exposure to riskier assets or investments.
If you’re searching for ways to protect your wealth or diversify your investment portfolio, gold may be a practical solution.
But first do your research to make sure you know the costs of storage and security, as well as understand that returns may not match those provided by other investments. This will help you make an informed decision about whether buying gold is the right choice for you.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.
Original – Charlie Barton
Many investors hold gold and silver to hedge against various economic crises. But does this hedge hold up during stock market crashes? Knowing what effect a market plunge and subsequent dollar collapse will have on silver and gold is vital to making investment decisions now and then deciding what course to take should a major recession or depression occur.
It’s a common assumption that gold and silver prices will fall right along with the market. And if that’s the case, wouldn’t it be better to wait to buy them until after the dust settles? But suppose that the investors have it right and that their precious metals do retain their value — or even gain value. During a depression, is it better to hold gold or silver? In other words, which one is going to give you the best chance of weathering the storm?
Before formulating a strategy, let’s first look at price data from past stock market crashes… and see what it can tell us that might influence investment decisions.
To help answer the questions posed above, I looked at past stock market crashes and measured gold and silver’s performance during each of them to see if there are any historical tendencies. The following table shows the eight biggest declines in the S&P 500 since 1976 and how gold and silver prices responded to each.[Note: Green signifies the value rose when the S&P crashed, red means it fell more than the S&P, and yellow denotes it fell but less than or the same as the S&P.]
What Happens to Gold and Silver During Stock Market Crashes
There are some reasonable conclusions we can draw from this historical data.
Does gold go up if a stock plunge occurs? In recent times, the answer has usually been, “Yes!” Notice this was regardless of whether the crash was short-lived or stretched over a couple years. Gold even climbed in the biggest crash of them all: the 56 percent decline that lasted two full years in the early 2000s. It seems clear that we should not assume gold will fall in a stock market crash — the exact opposite has occurred much more often.
You’ll recall that gold did fall in the initial shock of the 2008 financial crisis. This recent, albeit memorable, instance is perhaps why many investors think gold will drop when the stock market does. But while the S&P continued to decline, gold rebounded and ended the year up 5.5 percent. Over the total 18-month stock market selloff, gold rose more than 25 percent. The lesson here is that, even if gold initially declines during a stock market collapse, one should not assume it’s down for the count. In fact, history says it might be a great buying opportunity.
Gold rose more than 2,300 percent from its low in 1970 to the 1980 peak. So it isn’t terribly surprising that it fell with the broader stock market at that point. In recent years, the situation has been the exact opposite. Gold endured a 45 percent decline from its 2011 peak to its 2016 low, which was one of its worst bear markets in modern history. At the same time, this isn’t entirely a shock either, given its quick gains during the 2008 crisis and the 2011 crash.
In fact, it rose in only one of the S&P selloffs and was basically flat in another one. This is likely due to silver’s high industrial use (about 56% of total supply) and that stock market selloffs are usually associated with a poor or deteriorating economy. However, you’ll see that silver fell less than the S&P in all but one crash. This is significant because silver’s high volatility would normally cause it to fall more. Also notice that silver’s biggest rise (+15% in the 1970s) took place amidst its biggest bull market in history. It also ended flat by the end of the financial crisis in early 2009, which was its second-biggest bull market. In other words, we have historical precedence that silver could do well in a stock market crash if it is already in a bull market. Otherwise, it could struggle.
The overall message from history is this:
• Odds are high that gold won’t fall during a stock market crash, and in fact, it will likely rise instead. Silver might depend on whether it’s in a bull market.
So, why does gold behave this way?
The reason gold tends to be resilient during stock market crashes is that the two are negatively correlated. In other words, when one goes up, the other tends to go down.
This makes sense when you think about it. Stocks benefit from economic growth and stability while gold benefits from economic distress and crisis. If the stock market falls, fear is usually high, and investors typically seek out the safe haven of gold. If stocks are rockin’ and rollin’, the perceived need for gold from mainstream investors is low.
Historical data backs up this theory of negative correlation between gold and stocks. This chart shows the correlation of gold to other common asset classes. The zero line means gold does the opposite of that investment half of the time. If the line is below zero, gold moves in the opposite direction of that investment more often than with it; if it’s above zero, it moves with that investment more often than against it.
Stocks Have a Negative Correlation to Gold
You can see that, on average, when the stock market crashes (U.S. Equities on the chart), gold has historically risen more than declined. Gold has also historically outperformed the cash sitting in your bank account or money market fund. Even real estate values follow gold only a little more than half the time.
This is the practical conclusion for investors:
This doesn’t mean gold will automatically rise with every downtick in the stock market. In the biggest crashes, though, history says gold is more likely to be sought as a safe haven. So if you think the economy is likely to be robust, you may want to own less gold than usual. If you think the economy is headed for weakness, then you may want more gold than usual. And if you think the economy is headed for a period of upheaval, you may want to own a lot.
There’s one more possibility we have to consider…
It’s not always easy to predict if stocks will fall off a cliff. So what if they don’t? Or what if the market is just flat for a long period of time? You might think that’s unlikely, given the number of risks inherent in our economic, financial, and monetary systems today. But look at the 1970s — it had three recessions, an oil embargo, interest rates that hit 20 percent and the Soviet invasion of Afghanistan. Here’s how the S&P performed, along with how gold performed.
Gold Rose 2328% Trough to Peak While the S&P 500 Was Flat
The S&P basically went nowhere during the entire decade of the 1970s. After 10, years it was up a measly 14.3 percent (excluding dividends). Gold, on the other hand, posted an incredible return. It rose from $35 per ounce in 1970 to its January 1980 peak of $850, a whopping 2,328 percent.
In other words, gold’s biggest bull market in modern history occurred while the stock market was essentially flat. That’s because the catalysts for higher gold were unrelated to the stock market — they were more about the economic and inflationary issues occurring at the time. We have to allow for the possibility that this happens again and that citizens are drawn to gold for reasons unrelated to the performance of the S&P.
Anything can happen when markets are hit with extraordinary volatility. But regardless of what stocks might do, is it wise to be without a meaningful amount of physical gold and silver in light of all the risks we face today? I don’t think so.
Perhaps the ideal solution is to have a stash of cash ready to deploy if we get another big decline in precious metals — but to also have a stash of bullion already set aside in case the next crisis sends gold off to the races.
Original by – Jeff Clark, Senior Analyst, GoldSilver
The process of delivering and tracking gold is suspected to go through some substantial changes soon. Most of these changes pertain to the incorporation of the innovative blockchain technology. This is the same technology that powers the equally innovative creation of cryptocurrencies. Both of these creations are making headway in other industries, like mortgages and competitive gaming.
In simple terms, blockchain is a ledger that functions like an online journal that is impossible to tamper with. The ‘blocks’ are pieces of data and the ‘chain’ is the public ledger itself. As soon as something is added to the ‘chain’, the information remains there for public consumption from then on.
Already there are a substantial amount of companies that want to utilize this technology to secure gold transactions. Among them is Emergent Technologies Holdings, which is developing a blockchain that tracks the origin of gold. What’s more, it can track where it is going. On top of this, the company is introducing a digital token, going by the name of G-Coin. This is a digital title of ownership specifically for physical gold that EmTech’s blockchain is tracking.
“Think of it as blockchain logging every stage, from mining to end market to digital wallets.”
Blockchain technology is in the midst of completely reinventing both gold and diamond industries. On the whole, these industries contain complex ecosystems that rely heavily on supply chains. This is where cargo typically passes through an array of geographical locations before ultimately reaching its destination.
Since its inception, this technology has been responsible for the avoidance of corruption. Moreover, it improves the overall quality by way of tracking valuable assets at every milestone throughout their journey.
By effectively encoding gold in blockchains with digital methods, central banks and private holders alike will benefit from the process. They are able to account for every portion of the asset during its delivery. Those who are experts in this technology claim that blockchains have the potential to overthrow the current banking system. This is due to traditional banks essentially being the gatekeepers of these ledgers. Blockchains are capable of allowing both transaction participants to update the data on the ledger without middlemen involvement.
Gold, as we know it, is one of the most valuable and expensive resources that exist in the world. It possesses substantial trade and intrinsic value and its price per ounce is currently over $1,480. Central banks employ the use of a “trust” system for every instance in which foreign central banks store gold. As popular a method as it is, it is not the most reliable; especially when storing such a valuable asset as gold. As a case in point, the central bank of Germany couldn’t immediately repatriate some of its precious metals from the U.S. back in 2013.
With the use of blockchain technology, the act of storing and tracking gold would comparatively be more secure. Should Emergent Technologies prove to be successful with its incorporation of blockchain into gold delivery, the trust system could become archaic.
Admittedly, they are not the first company that was hoping to use blockchain technology as a means to track gold. Regardless of that, Emergent Technologies claims that their particular approach is “fundamentally different.” This is largely due to the core focus of their mission is to track gold that is “responsibly-sourced.”
Mitch Davis, the Chief Commercial Officer at EmTech, clarifies that notable characteristic of the company fully embracing that specific gold. To elaborate, where there is a noticeable increase in the demand and premiums for gold mined under such practices. This is something that is easier said than done, though. Making a guarantee that gold is what it claims to be – in the imposed quantity and quality – is difficult. Moreover, it’s hard to make sure that it is mined and perfected in a way that conforms with strict standards. Specifically, that of human rights, environmental, industrial, financial, and legal standards.
Among the many companies that are jumping on this bandwagon is Britain’s Royal Mint. It is starting to allow businesses and investors to buy and sell digital tokens that are representing gold through blockchain transactions. The primary intent of the Mint is to make gold into a more attractive investment. They plan to do this by making trading a lot easier and cheaper, especially when you compare it to alternatives. Such alternate methods include exchange-traded funds (ETFs) or directly purchasing and storing gold bullion.
The Royal Mint is responsible for manufacturing the U.K.’s currency. On top of that, it also sells bullion, commemorative coins, and an array of other products. By utilizing its new blockchain system, the Mint aims to make gold transactions easier by having them be more transparent. What’s more, it hopes to make these transactions economical.
The development of this new system was a collaborative effort with the Chicago Mercantile Exchange. In addition, there was also the application of technology deriving from two blockchain startups. This brand new system transacts blockchain tokens that go by the name of ‘Royal Mint Gold’ (RMG). Each one of these tokens is a digital representation of one gram of actual gold in storage at the Mint’s facilities.
The Mint states that the price of RMG will closely track the spot price of gold. At the time of this writing, this spot price is roughly $48 per gram. Pre-launch reports from last year imply that the Mint could potentially create up to $1 billion in tokens.
Investors will have the ability to buy and sell RMG digital tokens by way of an institutional trading platform. Furthermore, the official recording of these trades will be as blockchain transactions.
According to the Mint, transactions that occur in its blockchain system will offer a variety of advantages. Moreover, these advantages will be comparatively more beneficial than other gold trading methods. For instance, it claims that there are no annual fees for being the owner of RMG tokens. This is noteworthy especially when you compare it to annual fees of 0.25-0.5% for gold ETFs. Relating to that, there are also the annual fees for secure storage for gold bars of roughly 0.12-0.25%. That will translate into a higher return on investment for RMG. The reason for this is that, as time goes on, the compounding effect of fees gradually diminish the overall return.
With the use of RMG, traders are also able to purchase smaller amounts of gold in blockchain transactions. In addition, there is the available real-time pricing that exists during exchange opening hours. The Mint says that, unlike shares in a gold ETF, RMG is exchangeable for physical gold. Be that as it may, there will be a “fabrication charge” for anything that’s smaller than a 400-ounce gold bar.
The director of new business for the Royal Mint, David Janczewski, states the following:
“While things have improved in terms of gold trading over the centuries, it’s our view that it still remains difficult and relatively expensive as a commodity to invest in … Gold is known in the industry as a negative-return investment … What we’re trying to do with the announcement of Royal Mint Gold – or RMG – is to really address this issue and offer a better way to invest in solid digital gold.”
The London Bullion Market Association (LBMA), an over-the-counter market for trading gold and silver, made an announcement during October of last year. The core focus of its plan would be to revamp and improve transparency within the industry. They aim to do this with the incorporation of blockchain technology.
The technology has the potential to help expel unsatisfactory metals from the global supply chain. To be specific, metals that are “illegally mined or traded or used to finance conflict.” Evidently, this is a prominent industry-wide issue. To better explain this, there was an incident with three NTR Metals employees back in March of 2017. There were accusations from the FBI that they were importing up to $3.6 billion worth of gold from South American countries. They were refining it, selling it, and then sending the earnings back to “drug traffickers.”
So, in March of 2018, the LBMA took the initiative and asked for proposals. Those who were asked consisted of all 144 of the association’s members. These members would include the largest gold refiners, banks, and dealers in the world. With these proposals, they could determine how to track gold from mines to its final destination. Doing so will allow them to effectively prevent any instance gold bar counterfeit.
The association would later receive 26 proposals, all coming “from companies ranging from startups to major technology firms.” Sakhila Mirza, LBMA’s executive board director, did not disclose any specific names beyond that of IBM. The association, in general, is steadfast on not insisting on the utilization of blockchain technology. However, roughly 20 of the 26 responses were apparently open to the use of the technology in their project drafts.
The LBMA is planning to layout guidelines that will authorize and monitor technology providers. Mirza adds that:
“We need to set up criteria and standards that help us understand what is a credible blockchain solution … Once those have been appropriately established, the result would be a selection of service providers that meet the minimum standards.”
Last year, there were reports that JPMorgan, the most valuable bank by market capitalization, is joining in on this trend. As America’s largest bank, it’s using its enterprise version of the Ethereum blockchain that supports smart contracts – ‘Quorum’ – to tokenize gold bars.
The first announcement of Quorum was back in October of 2016 as part of the Ethereum Enterprise Alliance (EEA). The U.S. bank came forward with an innovative blockchain-powered system. The intent of this system is to reduce the mandatory number of parties to validate global payments. By doing this, they can cut transaction times “from weeks to hours.”
The transition took place just one month following the CEO of JPMorgan, Jamie Dimon, famously calling Bitcoin “a fraud.” What’s more, Dimon was of the belief that it “won’t end well.” This was a comment that he would later add to, saying that he does not care about the cryptocurrency. Though, he made sure to mention that “blockchain is real.”
During the Sibos conference in Sydney, JPMorgan made mention of the concept of “tokenizing” assets. The company’s head of blockchain initiatives, Umar Farooq, would further elaborate on the idea:
“They wrap a gold bar into a tamper-proof case electronically tagged, and they can track the gold bar from the mine to endpoint – with the use case being, if you know it’s a socially responsible mine, someone will be willing to pay a higher spread on that gold versus if you don’t know where it comes from. Diamonds are another example.”
During the course of 2018, leaders in the gold and diamond industry were partnering with IBM to develop a blockchain network. With this new network, they could trace the origin of any piece of jewelry. In late April of that year, a consortium of jewelry industry heads made an announcement about the TrustChain initiative.
“The TrustChain Initiative is a partnership of precious metals refiner Asahi Refining, jewelry retailer Helzberg Diamonds, precious metals supplier LeachGarner, jewelry manufacturer The Richline Group, and independent verification service UL. The measure aims to provide increased transparency across the supply chain.”
This initiative draws its foundation from the IBM Blockchain Platform and the Hyperledger Project. Its design allows it to verify and track diamonds and precious metals from their origin to their retail location. It provides its users with an array of features, which include verification of process and “third-party oversight.” Moreover, it provides digital and physical product validation. Overall, its objective is to make sure that customers’ jewelry purchases are properly sourced.
Upon applying this technology, these companies have the potential to carry out various tasks. They can digitize processes and establish an unchangeable record of transactions within the network. Furthermore, they would be capable of enabling access to trusted data in real-time.
The number of companies incorporating blockchain technology into their gold tracking systems is continuously growing. With other precious metals like diamonds receiving the same treatment, it seems like more instances of blockchain usage are on the horizon.
Gold is respected throughout the world for its value and rich history, which has been interwoven into cultures for thousands of years. Coins containing gold appeared around 800 B.C., and the first pure gold coins were struck during the rein of King Croesus of Lydia about 300 years later. Throughout the centuries, people have continued to hold gold for various reasons. Societies, and now economies, have placed value on gold, thus perpetuating its worth. It is the metal we fall back on when other forms of currency don’t work, which means it always has some value as insurance against tough times. Below are eight potential reasons to own gold today.
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. Since ancient times, people have valued the unique properties of the precious metal. Gold doesn’t corrode and can be melted over a common flame, making it easy to work with and stamp as a coin. Moreover, gold has a unique and beautiful color, unlike other elements. The atoms in gold are heavier and the electrons move faster, creating absorption of some light; a process which took Einstein’s theory of relativity to figure out.
Although the U.S. dollar is one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices . The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a number of reasons, including the country’s large budget and trade deficits and a large increase in the money supply.
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years. This is because when fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to arise along with everything else. Moreover, gold is seen as a good store of value so people may be encouraged to buy gold when they believe that their local currency is losing value.
Deflation is defined as a period in which prices decrease, when business activity slows and the economy is burdened by excessive debt, which has not been seen globally since the Great Depression of the 1930s (although a small degree of deflation occurred following the 2008 financial crisis in some parts of the world).. During the Depression, the relative purchasing power of gold soared while other prices dropped sharply. This is because people chose to hoard cash, and the safest place to hold cash was in gold and gold coin at the time.
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union. Its price often rises the most when confidence in governments is low.
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to Goldsheetlinks.com, gold saw a rebound in production with output hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.
In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world; it has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold (though it has taken a tumble in 2012.) In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast.
Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as one of the world’s largest holders of gold bullion in 2008, only four years after its inception.
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:
Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering. (For related reading, see “Has Gold Been a Good Investment Over the Long Term?“)
By TONY DALTORIO Updated Jun 22, 2019