Source: From Wikipedia
Gold as a financial asset
Gold and other
precious metals are
assets that are both
tangible and
liquid (i.e. easily traded), unlike
real estate which is tangible but not liquid, or company
shares and
bonds which are liquid but not tangible.
Considering its high density and high value per unit mass, storing and transporting gold is very easy. Gold also does not corrode. Historically, it was also very easy to verify that an offered coin had the density of gold through the use of
Archimedes' principle. Today, however, some metals are denser than gold yet cheaper. While some think gold deserves special treatment based on its cultural value and use as money, others consider gold a
commodity, like
copper or
lead.
[
edit] Buying physical gold
Some people, sometimes referred to as
gold bugs, buy gold which they retain in their physical possession in the belief that should the monetary and financial system collapse, gold would still be considered valuable. Other reasons for doing so include the ease of hiding the gold from others, such as tax authorities.
[
edit] Buying gold for the gold price
Some people buy gold not in their physical possession, but stored for them by a bank, through a
gold exchange-traded fund, or in the form of a
gold certificate; their motivations also apply to those who hold gold physically.
Some asset allocation strategies use exposure to gold as a form of
diversification, though the inclusion of gold in model portfolios created by major financial advisory companies is no longer common. Gold may be included in
portfolios as an
insurance against unforeseen calamities which may affect the price of other investments negatively.
From the perspective of a currency trader, one can view gold as simply another form of currency and that buying gold is a process analogous to
currency speculation. For example, when it is expected that the dollar will soon decline against other currencies, for an investor who normally covers his expenses in dollars, buying gold or other currency before the decline and selling it afterwards could realize a profit. Additionally
speculators attempt to make a profit by predicting the gold price, and detecting
market trends they believe will show them the future price direction.
For centuries gold has been used as a
store of value. When viewed from the historical perspective of a multicentury time frame, no other investment has the wealth preserving power of gold. Other assets are dependent upon a certain government or political climate to retain value, appreciate, and not be excessively taxed, but gold is largely independent of political climate (with the exception of laws specifically confiscating gold as
Franklin Roosevelt did). Gold investors believe that political and economic turmoil may have a negative influence on the value of their other investments, but the opposite effect on the value of gold.
[
edit] Types of gold investor
Investors may buy gold as an investment because they are either one of, or a combination of, the following:
Asset allocator
Gold, a popular investment and part of many asset allocation models in the 1970s,
[8] has largely been abandoned since the 1980s. However, some asset allocators and investment advisors are again advocating it.
[9] [10] [11] [12]Cacheurs (people hiding wealth)
Physical gold can be
anonymous. Gold is a very soft metal, meaning that (assuming the gold is in the physical possession of the owner) a bar's
serial number can be altered or obliterated with a hammer and chisel.
Bullion coins typically will have no serial numbers in the first place. If the bullion's ownership is not recorded anywhere the gold can become untraceable. Cacheurs seek to hide part of their wealth from their
spouse, family,
tax authorities, creditors,
thieves, invaders or others. The density of gold allows them to store a large value in a very small space, without fear of depreciation or erosion over a long period of time.
Central banks
Although central banks as a whole have been net sellers of gold over the last few years, some have been buyers. A central bank may invest in gold in order to ensure that part of its reserves are held in a liquid and tangible form which could be used quickly in times of crisis. Most central banks keep the majority of their reserves in USD, but like any other investor diversification makes sense. The dollar is a liability of the United States of America. Its value thus depends on the USA honoring it in exchange for goods or services. Central banks may fear that in a time of crisis, or if there were a USD crisis, dollars may not prove to be useful. This might happen if sanctions or exchange controls exist. The banking system may make it hard to move USD if restrictions were imposed.
Currency speculator
Since the main gold market is priced in
US dollars, speculators who believe the dollar will decline may buy gold. They think that if the dollar declines, the gold price will remain constant in other currencies, thus rising in terms of the U.S. dollar. Gold may also be bought if they feel that a different currency will decline, since they expect the dollar price to be stable, but the foreign currency price to rise.
Financial institutionsBanks and funds may invest in gold to protect themselves against potential loss on gold linked products that they have issued. These may include gold certificates, options, forward contracts, gold linked notes and other products containing a derivative feature linked to the gold price.
Gold bugGold bugs, in the traditional sense, believe in, fear, or even hope for another
Great Depression or
Armageddon, and believe that by holding gold they will survive and prosper.
Krugerrands are a popular way to invest in gold because they have low premiums over spot.
Hoarder
Some investors consider gold as a long-term store of value and invest in it to maintain their
purchasing power. By buying gold and hanging on for the long term, they believe they can keep their wealth intact.
LibertarianLibertarians may use privately issued
digital gold currency, in preference to
fiat currency, for reasons such as lack of trust in
fractional-reserve banking or
monetary policy.
Petroleum speculator
Some have speculated that there is a correlation between the price of oil and the price of gold. The general rule is that the price of an ounce of gold is 10 times the price of a barrel of oil.
[13] This is in part because mining gold is an energy intensive process, the cost to mine an ounce of gold will increase as the price of oil increases and in part because they are both commodities and often affected by the same economic stimuli. Source:
[14] Buying gold is one way for a speculator to bet on the price of oil going up.
Portfolio hedger
Similar to asset allocators, except the purpose of the investment is to
hedge against rapid inflation or unforeseen calamities which may affect other investments negatively. These individuals believe that certain events, if they occur (e.g.
war or economic crisis), may have a negative influence on the value of their other investments, but the opposite effect on the value of their gold.
SpeculatorSpeculators attempt to make a profit by predicting the gold price. They may think that
macroeconomics are affecting the demand for gold, or believe they have detected a
market trend showing them the future price direction.
EspionageThe survival kit issued to US and British Fighter Pilots includes gold sovereigns to help bribe local officials independent of local currencies.
[15] In the James Bond books by Ian Fleming, James regularly travelled wearing a belt containing 20 gold
sovereigns.
