What is gold? Is gold a good investment?

Gold is one of the most valuable precious metals that exists. It is a malleable transition metal, well known for its bright yellow color. Gold’s chemical symbol is Au and its atomic number is 79. It is commonly used to make coins, as well as being utilized in art and in jewelry.

It is the most malleable of all metals, i.e. it can most easily be hammered or pressed into different shapes without breaking or cracking.

However, gold is frequently bought as an investment too. It is important to remember that investing in this precious metal is speculative – prices can go down as well as up. Ian Rees, head of multi-asset research at Premier Capital, said “Investors in gold should increasingly view the asset as a speculative investment rather than a haven in time of crisis.”

Gold was once used in a monetary policy called “the gold standard”, in which every economic unit of account was based on a certain amount of gold.

Gold historyFunerary mask of Egyptian pharaoh Tutankhamun (ruled 1332–1323 BC). Humans have been using gold for many thousands of years. (Image: Wikimedia)

However, as of 2012 no countries use a gold standard as the basis of their monetary system.

The value of gold is determined by its rarity and qualities that other metals do not have, such as its non-reactiveness, non-corrosiveness, and easy smelting.

Despite not using a gold standard as part of their monetary policy, many countries still keep massive reserves of the metal as financial assets, which can help defend their currency and as collateral against loans.

For example, if one day there were a catastrophe in the UK and the British Pound lost all its value, the country would still have significant gold reserves stored as valuable assets.

The United States had 8,133.5 tonnes of gold stored in March 2015, which represented 74% of its forex reserves.

Gold is currently traded in liquid markets, serving as a store of wealth and an investment – given that its value has sharply increased over the past century.

Graph representing gold price per ounce in USD (1960-2012)

gold price history graph

Investing in gold

Gold is one of the most common precious metals bought as an investment.

Investors typically buy gold to protect themselves from fiat currency crises (which can drive the value of currencies such as the US dollar down).

Fiat currencies usually go down in value following: market failures, inflation, war, and increasing national debt.

In a nutshell, these are good indicators of when to buy gold. However, there are many more influencing factors.

Gold is based on fear and security, according to some financial experts. Warren Buffet once said:

“The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

Factors that influence the price of gold

The price of gold is announced twice each business day by the five members of The London Gold Market Fixing Ltd.

The price of every commodity (including gold)  is determined by both supply and demand and speculation.

However, according to the World Gold Council, the price of gold is primarily driven by changes in demand, as opposed to changes in supply, given that its supply is rather limited – there are currently 174,100 metric tonnes of stocks in existence above ground.

Central banks – central banks and the International Monetary Fund are important institutions involved in setting gold prices. In fact, around 19 percent of all above-ground gold is kept as official gold reserves by central banks.

The price of gold is very much affected by the monetary policy decisions that central banks make regarding interest rates. The general rule of thumb is that as interest rates rise gold prices rise.

Jewelry demand – jewelry demand rises in periods of price stability or steadily rising prices, and drops in periods of price volatility.

In addition to looking at macroeconomic factors, people can use technical strategies when deciding to invest in gold.

Technical analysis

Investors can make an investment decision partly on technical analysis, which involves analyzing:

  • chart patterns
  • market trends
  • moving averages
  • the economic cycle

Investing in gold versus stocks

There is a difference between investing in stocks and investing in gold. Usually people invest in gold as a store of value, while investing in stocks is done to generate a return on value.

Ways of investing in gold

Bullion gold bars – this is the most traditional means of purchasing of gold. These can be bought in major banks or by using bullion dealers. Gold bars are available in different weights (typically 10 grams, 100 grams, or 1 kg).

Gold coins – gold coins are similar to gold bars in that their price is determined according to their weight. The most common gold coin is the Krugerrand. Other gold coins include: the Mexican Gold 50 Peso, the Australian Gold Nugget (Kangaroo), the Austrian 100 Corona, the Chinese Gold Panda, the American Gold Eagle, the American Buffalo, the French Napoleon, the British Sovereign, and the Canadian Gold Maple Leaf.

Gold certificates – this is a certificate of ownership that gold owners can hold without actually storing the gold. The certificates are either allocated (there is a specific bar number associated with the certificate) or unallocated (essentially a form of fractional reserve banking in which there is no guarantee of an equal exchange for gold).

Exchange traded funds (ETFs) – investing in a gold ETF is one of the easiest and most convenient means of investing in gold as you do not actually acquire any physical metal, rather you are investing in a fund that replicates the movement of the price of gold. An example of a gold ETF is streetTRACKS Gold Shares (GLD) which trade on the New York Stock Exchange.

Investing in gold mining companies – the stock value of gold mining companies is usually more volatile than gold itself. However, if gold prices increase then so should the stock value of the mining company. This is essentially an “indirect” way of investing in gold.

Video – Gold demand trends explained