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					AHSON TARIQ                                                                             

                       GOLD – A SAFE HAVEN ?

Why Gold

Gold and Inflation                        Investors in gold can point to a         While gold has shown strong
                                          growing body of research supporting      returns over recent years, its
For thousands of years, gold has          gold's reputation as a protector of      most valuable contribution to a
been valued as a global currency, a       wealth against the ravages of            portfolio lies in the fact that it is
commodity, an investment and              inflation. Market cycles come and        not correlated with most other
simply an object of beauty. As            go, but extensive research from a        assets, as shown in the chart
financial markets developed rapidly       range of economists has                  below. This is because the gold
during the 1980s and 1990s, gold          demonstrated that, over the long         price is not driven by the same
receded into the background and           term, through both inflationary and      factors that drive the
many investors lost touch with this       deflationary periods, gold has           performance of other assets.
asset of last resort. Recent years        consistently maintained its              Similar data and charts covering a
have seen a striking increase in          purchasing power.                        range of countries can be
investor interest in gold. While a                                                 downloaded from our investment
sustained price rally, underpinned by     In the short run, experience has         statistics page.
the fact that demand consistently         shown that gold can deviate from its
outstrips supply, is clearly a positive   long-run inflation-hedge price, and,
factor in this resurgence, there are      when enjoying a sustained buoyant
many reasons why people and               period, as is currently the case, can
institutions around the world are         offer opportunities for impressive
once again investing in gold.             returns.

The value of gold, in terms of the real   Portfolio Diversification
goods and services that it can buy,
has remained largely stable for many      Asset allocation is an important
years. In 1900, the gold price was        aspect of any investment strategy.       ENLARGE
$20.67/oz, which equates to about         By balancing asset classes of
$503/oz in today's prices. In the two     different correlations, investors        The sources of demand for gold
years to end-December 2006, the           hope to maximize returns and             are far more diverse - both
actual price of gold averaged $524.       minimize risk. However, while many       geographically and sectorally -
So the real price of gold changed         investors may believe that their         than those for many other assets,
very little over a century                portfolios are adequately diversified,   which helps to explain the
characterized by sweeping change          they typically contain only three        independence of the gold price as
and repeated geopolitical shocks. In      asset classes - stocks, bonds and        well as why identifiable demand
contrast, the purchasing power of         cash.                                    has remained robust in the face
many currencies has generally
                                                                                   of a rally that has spanned
                                          To counter adverse movements in a        several years. The value of gold
                                          particular asset or asset class, many    demand increased by 79%
                                          investors now strive to achieve more     between 2003 and 2007, and by
                                          effective diversification in their       158% between 2001 and 2007.
                                          portfolios by incorporating              Moreover, most spending on gold
                                          alternative investments such as          is discretionary. 68% of total
                                          commodities.                             identifiable demand over the five
                                                                                   years to December 2007 came

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AHSON TARIQ                                                                            

from the jewelry sector, with a           But research in 2004, examining the      Gold is unique in that it does not
further 19% from investment and           relationship between the gold price      carry a credit risk. Gold is no
13% from industrial demand. This is,      and the exchange rate of various         one's liability. There is no risk
in itself, unusual for commodities,       currencies against the US dollar from    that a coupon or a redemption
where demand is typically driven by       1971 to June 2002, provided firm         payment will not be made, as for
non-discretionary spending and is         evidence of gold's effectiveness as a    a bond, or that a company will go
consequently more exposed to the          dollar hedge.                            out of business, as for an equity.
vagaries of the economic cycle.                                                    And unlike a currency, the value
                                          The gold price was found to be           of gold cannot be affected by the
Gold offers enhanced diversification      negatively correlated with the US        economic policies of the issuing
opportunities relative to many            dollar and this relationship appeared    country or undermined by
alternative assets. Independent           to be consistent over time and           inflation in that country. At the
studies have shown that while             across exchange rates. The research      same time, 24-hour trading, a
alternative assets and traditional        established that despite this period     wide range of buyers - from the
diversifiers often fail during times of   (1971-2002) being one of                 jewelry sector to financial
market stress or instability, even a      considerable economic turbulence,        institutions to manufacturers of
small allocation to gold may              gold was, throughout, a consistently     industrial products - and the wide
significantly improve the consistency     good protection against this             range of investment channels
of portfolio performance during both      instability and the exchange rate        available, including coins and
stable and unstable financial periods.    fluctuations it caused.                  bars, jewelry, futures and
                                                                                   options, exchange-traded funds,
Gold and the Dollar                       Another recent study by the metals       certificates and structured
                                          consultancy GFMS Ltd. examined the       products, make liquidity risk very
Gold has long been regarded by            strength of the link between 22          low. The gold market is deep and
investors as a good protection            commodities and the US dollar. The       liquid, as demonstrated by the
against depreciation in a currency's      results clearly suggested that gold is   fact that gold can be traded at
value, both internally (i.e. against      not only a more potent hedge             narrower spreads and more
inflation) and externally (against        against the US dollar than other         rapidly than many competing
other currencies). In the latter case,    commodities, but also that it            diversifiers or even mainstream
gold is widely considered to be a         provides protection when most            investments.
particularly effective hedge against      needed (when the dollar is losing
fluctuations in the US dollar, the        value), with relatively little loss of   Gold is of course subject to
world's main trading currency.            upside during a period of dollar         market risk, as is clear from the
                                          appreciation.                            experience of the 1980s when
                                                                                   the gold price declined sharply.
                                          Gold and Risk                            But many of the downside risks
                                                                                   associated with the gold price are
                                          Financial instruments usually carry      very different to the risks
                                          three main types of risk.                associated with other assets, a
                                                                                   factor which enhances gold's
                                                                                   attractiveness as a portfolio
                                           Credit risk: the risk that a debtor
                                                                                   diversifier. For example, should a
                                            will not pay
                                                                                   central bank announce its
                                           Liquidity risk: the risk that the
                                                                                   intention to engage in substantial
                                            asset cannot be sold as a buyer
ENLARGE                                                                            sales of gold, as happened prior
                                            cannot be found.
                                           Market risk: the risk that the         to the Central Bank Gold
While this has been widely believed                                                Agreement in 1999, this would be
                                            price will fall due to a change in
for many years, it did not, until                                                  unlikely to have an impact on
                                            market conditions.
relatively recently, have formal                                                   equity returns but could
statistical support.                                                               reasonably be expected to affect

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AHSON TARIQ                                                                                   

the gold price in the short run.                  GOLD PRICE TRENDS                       Gold is unique because it is both
Similarly, the specific risks to which                                                    a commodity and a monetary
bonds and equities are exposed,                   A review of the average annual          asset. Its tendency to move
including pressure on the health of               prices for the last 20 years (from      independently and not be
the government and corporate                      1998 to 2008) both in US$ and £,        influenced by external factors in
sector during an economic                         reveals a 109% and 89% increase         the same way as other markets is
downturn, are not shared by gold.                 respectively. Surprisingly, in Indian   rooted in its supply and demand
                                                  Rupee terms, this increase has been     dynamics. More specifically, the
One measure of market risk is                     over 500% during the last 20 years.     geographic and sectoral diversity
volatility, which measures the                    In Pakistan, gold has seen a price      of gold demand helps insulate
dispersion of returns for a given                 increase of over 230% during the last   the precious metal from western
security or market index. The more                7 years alone. And this was during a    economic cycles.
volatile an asset, usually the riskier it         period when the investors’
is. The gold price is typically less              confidence in the global financial      Rozanna Wozniak, Investment
volatile than other commodity                     system was firm and not as shaken       Research Manager, World Gold
prices. This is because of the depth              as it is today.                         Council commented:
and liquidity of the gold market,
which are supported by the                                                                “We are not surprised by the way
availability of large above-ground                                                        gold has reacted. The gold price
stocks of gold. Because gold is                                                           initially dipped slightly in the
virtually indestructible, nearly all of                                                   wake of this week’s financial
the gold which has ever been mined                                                        market problems, because it was
still exists, much of it in near market                                                   acting as an insurance policy and
form. This means that sudden excess                                                       coming to the aid of stricken
demand for gold can usually be                                                            investors or holders and being
satisfied with relative ease. As a                                                        sold accordingly. With the
result, gold is generally slightly less                                                   cataclysmic downfall of a
volatile than heavily traded blue-chip                                                    financial institution that was
stock market indices such as the FTSE             RECENT EVENTS                           seemingly indestructible,
100 or the S&P 500.                                                                       investors around the world are
                                                  World Gold Council issues update        on tenterhooks for the next piece
                                                  on gold’s response to financial         of bad news. In just one day we
                                                  market turmoil                          have seen 6 per cent increase in
                                                                                          GLD, the world’s largest gold ETF,
                                                  18 September, 2008 | The gold price     up from 614 tonnes to 650
                                                  rose $50 today to $863/oz at the PM     tonnes. This follows evidence of
                                                  fix, the largest one day rise since     widespread physical buying in
                                                  February 1980, as investors took a      key gold markets around the
                                                  ‘flight to quality’ to protect their    world. Gold, as no one’s liability,
                                                  wealth from the corrosive effects of    is looking like a good place to be
                                                  the current uncertainty that has        right now.”
For a broader range of volatility statistics >>   spread throughout financial markets
                                                  across the globe. Like all physical     In addition to gold’s safe haven
                                                  commodities, gold is an asset that      attribute, the World Gold Council
                                                  bears no credit risk and therefore      notes that despite the recent
                                                  involves no counterparty and is no      decline in the oil price,
                                                  one’s liability.                        inflationary pressures in many
                                                                                          parts of the world remain
                                                                                          significant. Gold is seen as a

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AHSON TARIQ                                                                              

hedge against inflation; while its real   Gold coin sales halted after retail       predicted that by September
value can vary in the short term, its     rush                                      2008 prices will be at about $840
purchasing power has remained                                                       an ounce, almost the correct
stable over centuries.                                          level just ten days ago.

These short-term factors have,            September 25 2008 | The rush by           Jeremy Charles, the LBMA
however, occurred on top of longer-       retail investors into gold on Thursday    chairman, told delegates that
term movements in supply and              forced the US government to               gold's role as a safe haven has
demand fundamentals that have             "temporarily" suspend the sales of        returned as a vengeance amid
supported the rise in the gold price      the popular American Buffalo one-         Wall Street's woes.
since 2001:                               ounce bullion coin after depleting its
                                          inventories.                              "High bullion prices are here to
 Mine output. The gradual                                                          stay," he said. His bullish
  reduction of mine output in recent      The shortage of gold coins is the         comments came as many
  years, with only a small number of      latest sign of investors seeking a safe   delegates said they forecast gold
  major gold finds by the mining          haven into bullion amid Wall Street       prices in 2009 in a $700 to $1,200
  industry, is constraining supply.       woes. Gold prices this week surged        an ounce range.
  The cost of extracting gold has also    above $900 an ounce, up about 20
  increased substantially in recent       per cent from its level before the        Gold prices hit an all-time high of
  years.                                  collapse of Lehman Brothers.              $1,030.80 an ounce earlier this
 Jewelry demand. Robust global                                                     year.
  jewelry demand reaching $54bn in        Gold set to cement safe haven
  2007, a third successive annual         status                                    Some delegates, however, said
  record. In tonnage terms, overall                                                 that while they were bullish on
  jewelry demand in 2007 was 5%                                                     gold prices on the short-term
  higher than in 2006                                                               because investors seeking
 Both institutional and retail                                                     refugee and forecasted prices as
  investors are increasingly familiar                                               high as $1,000 an ounce, also
  with gold’s portfolio                                                             warned that it was unlikely that
                                          September 30 2008 | Gold prices
  diversification benefits. The                                                     record prices could be sustained
                                          will rise next year as the financial
  reason for holding diverse                                                        during a long period as jewelry
                                          crisis pushes more investors into the
  investments is to protect the                                                     demand was likely to suffer.
                                          precious metal safe haven, according
  portfolio against fluctuations in
                                          to delegates polled on Tuesday
  the value of any single asset class
                                          during the London Bullion Market          The majority of the LBMA's
  or set of assets that move in a
                                          Association annual meeting in Kyoto.      delegates – a mix of about 500
  similar direction. Portfolios that
                                                                                    mining executives, precious
  contain gold can be more robust
                                          The gold industry forecasts bullion       metals traders and brokers,
  and better able to cope with
                                          prices at about $958.6 a troy ounce       bankers, consultants and central
  market uncertainties than those
                                          by November next year, according to       bankers – said that the US dollar
  that do not.
                                          the annual LBMA poll among                will be weaker by November
 Easier access to investing in gold.                                               2009 than today.
  Gold exchange traded funds (ETFs)       delegates. The poll, which has been
  have been instrumental in               a reliable indicator in the past,
                                          compares with current prices just         The majority – a 56 per cent –
  providing easy access to investing
                                          above $902.                               said the financial system will be
  in gold. ETFs have stimulated
                                                                                    in a better shape. A minority 21
  demand because it has become as
                                          Last year, LBMA delegates gathered        per cent said the crisis will
  easy to trade gold as it is to trade
                                          in Mumbai correctly forecast gold         worsen in the next 12 months,
  any stock or share.
                                          prices surging to record levels and       while a 23 % said the crisis will be
                                                                                    basically as bad as it is today.

                                                         Page 4
AHSON TARIQ                                                                            

Mr. Charles, who is also head of          How to Invest in Gold                    between coins and dealers. The
precious metals at HSBC in London,                                                 premium tends to be higher for
said that investors were returning to     COINS AND SMALL BARS                     smaller denominations. Bullion
gold as confidence in the US dollar                                                coins range in size from 1/20
and some assets classes was shaky.                                                 ounce to 1000 grams, although
He said that the change was likely to                                              the most common weights (in
be a structural change, rather than a                                              troy ounces of fine gold content)
short-term phenomenon that will                                                    are 1/20, 1/10, 1/4, 1/2 and 1
fade away with calmer markets.                                                     ounce. It is important not to
                                                                                   confuse bullion coins with
"Gold will be looked in a different       The first gold coins were struck by      commemorative or numismatic
way even when the credit crisis           King Croesus, ruler of Lydia in          coins, whose value depends on
ends," he said.                           western Asia Minor from 560 to           their rarity, design and finish
                                          546BC, whose wealth came from the        rather than on their fine gold
                                          gold from the mines and sands of         content. Many dealers sell both.
Jonathan Spall, head of commodities
                                          the River Pactolus. Gold coins have      For more information, visit
sales at Barclays Capital, added that
                                          been legal tender ever since. Bullion
the gold market was witnessing a
                                          coins and small bars offer private
"sea change" as bullion was
                                          investors an attractive way of
attracting new players, such as
                                          investing in relatively small amounts
hedge funds, that previously
                                          of gold. In many countries - including
considered the metal as a relic.
                                          the whole of the European Union -
                                          gold purchased for investment
"Hedge funds see those days gold a        purposes is exempt from Value
much interesting place to be in," Mr      Added Tax.
Spall said.

Bankers at the Kyoto's meeting said                                                Small gold bars
spooked investor were so deeply
worried about the stability of the                                                 Gold bars can be bought in a
financial system, that rather than                                                 variety of weights and sizes,
just investing in gold, they were                                                  ranging from as little as one gram
placing their money into physical                                                  to 400 troy ounces (the size of
gold, taking delivery of bullion bars                                              the internationally traded London
and coins, placing their investment                                                Good Delivery bar). Small bars
outside the financial system.             Bullion coins                            are defined as those weighing
                                                                                   1000g or less. According to
"Vault staff is doing a lot of overtime   Investors can choose from a wide         industry specialists Gold Bars
this weeks," a banker said.               range of gold bullion coins issued by    Worldwide, there are 94
                                          governments across the world.            accredited bar manufacturers
                                          These coins are legal tender in their    and brands in 26 countries,
                                          country of issue for their face value,   producing a total of more than
                                          rather than for their gold content.      400 types of standard gold bars
                                          For investment purposes, the market      between them. They normally
                                          value of bullion coins is determined     contain a minimum of 99.5% fine
                                          by the value of their fine gold          gold. The Gold Bars Worldwide
                                          content, plus a premium or mark-up       website provides a wealth of
                                          that varies                              additional information regarding
                                                                                   the international gold bar

                                                          Page 5
AHSON TARIQ                                                                             

EXCHANGE-TRADED GOLD                     allocated to each particular investor,    Electronic Currencies | E-Dinar
                                         who pays the custodian for storage
Gold-backed securities                   and insurance. The holder of gold in      There are also electronic
                                         an allocated account has full             'currencies' available - linked to
Gold is traded in the form of            ownership of the gold in the              gold bullion in allocated storage -
securities on stock exchanges in         account, and the bullion dealer or        which offer a simple and cost-
Australia, France, Hong Kong, Japan,     depository that owns the vault            effective way of buying and
Mexico, Singapore, South Africa,         where the gold is stored may not          selling gold, and using it as
Switzerland, Turkey, the United          trade, lease or lend the bars except      money. Any amount of gold can
Kingdom and the United States. By        on the specific instructions of the       be purchased, and these
design, these forms of securitized       account holder. For more details visit    currencies allow gold to be used
gold investment, all regulated                          to send online payments
financial products, are generally                                                  worldwide.
referred to as Exchange Traded           Unallocated account
Commodities or Exchange Traded                                                     What is e-dinar?
Funds (ETFs), and are expected to        Investors do not have specific bars
track the gold price almost perfectly.   allotted to them (unless they take        e-dinar is the name of an internet
Unlike derivative products, the          delivery of their gold, which they can    based electronic payment and
securities are 100% backed by            usually do within two working days).      exchange system that facilitates
physical gold held mainly in allocated   Traditionally, one advantage of           online transactions 100% backed
form. These securities have had a        unallocated accounts has been the         by physical gold and silver.
major impact on the gold market,         lack of any storage and insurance
representing 38% of identifiable         charges, because the bank reserves        e-dinar and e-dirham are the
investment and 7.5% of total             the right to lease the gold out. Now      electronic units used within the
demand in 2007. Financial advisors       that the gold lease rate is negative in   e-dinar system.
and other investment professionals       real terms, some banks have begun
can provide further details about        to introduce charges even on              Each e-dinar electronic unit
these products.                          unallocated accounts. Investors are       corresponds to an exact, fixed
                                         exposed to the creditworthiness of        weight of 4.25 grams of pure 24k
Gold accounts                            the bank or dealer providing the          gold. Each e-dirham corresponds
                                         service in the same way as they           to an exact, fixed weight of 3
Gold bullion banks offer two types of    would be with any other kind of           grams of .999 silver. These units
gold accounts - allocated and            account. As a general rule, bullion       are infinitely divisible thus
unallocated:                             banks do not deal in quantities           allowing large as well as very
                                         under 1000 ounces - their customers       small transactions.
                                         are institutional investors, private
Allocated account
                                         banks acting on behalf of their           The physical gold and silver
                                         clients, central banks and gold           bullion backing e-dinar and e-
Effectively like keeping gold in a
                                         market participants wishing to buy        dirham units are always
safety deposit box, this is the most
                                         or borrow large quantities of gold.       equivalent or larger than all
secure form of investment in
                                                                                   electronic e-dinar and e-dirham
physical gold. The gold is stored in a
                                         Other opportunities for smaller           in circulation. The physical gold
vault owned and managed by a
                                         investors include:                        and silver bullion is held securely
recognized bullion dealer or
                                                                                   in internationally renowned
depository. Specific bars (or coins,
                                                                                   bullion repositories.
where appropriate), which are
numbered and identified by
                                                                                   Transactions are executed using
hallmark, weight and fineness, are
                                                                                   e-dinar and e-dirham units and,

                                                        Page 6
AHSON TARIQ                                                                            

as a rule, do not result in physical movement of gold or silver in the bullion repository. The exceptions are large
transactions of at least USD 150,000 where gold bars are physically moved between pallets.

Account holders always have the option to exchange their e-dinars and e-dirhams into any major national
currency or redeem them and take physical possession of an equivalent amount of gold dinar and silver dirham.
For further details, please visit

Gold Accumulation Plans

Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based on the principle
of putting aside a fixed sum of money every month. What makes GAPs different from ordinary savings plans is
that the fixed sum is invested in gold. A fixed sum of money is withdrawn automatically from an investor's bank
account every month and is used to buy gold every trading day in that month. The fixed monthly sums can be
small, and purchases are not subject to the premium normally charged on small bars or coins. Because small
amounts of gold are bought over a long period of time, there is less risk of investing a large sum of money at the
wrong time. At any time during the contract term (usually a minimum of a year), or when the account is closed,
investors can get their gold in the form of bullion bars or coins, and sometimes even in the form of jewelry.
Should they choose to sell their gold they can also get cash.

Reference Material:

      Short-run and Long-run determinants of the                  What sets the precious metals apart from
    Price of Gold                                                other commodities?
    by Eric J Levin and Robert E Wright, 2006                    by Rhona O'Connell, 2005
      Inflation Protection: Why Gold Works better                Why is gold different from other assets? An
    than 'Linkers'                                               empirical investigation
    by David Ranson, 2005                                        by Colin Lawrence, 2003
      Gold as a Store of Value                                    Gold as a Hedge against the US Dollar
    by Stephen Harmston, 1998                                    by Forrest Capie, Terence C Mills and Geoffrey
      Gold as a Strategic Asset                                 Wood, 2004
    by Richard Michaud, Robert Michaud, Katharine                   Commodity Prices and the Influence of the US
    Pulvermacher, 2006                                           Dollar
      Investing in gold: The Strategic Case                     by Nikos Kavalis, 2006
    by Natalie Dempster                                         Digital Gold Currency Online Magazine - e-dinar
   Digital Gold Currency Resources                              Issue
                                                                Malaysia-Based Mint for e-dinar

All gold related figures and stats were taken from World Gold Council’s website

Registration at is necessary to access and download the above PDF files, which is free and involves
a five-minutes process.

                                                        Page 7
AHSON TARIQ                                                 

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