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With gold
appreciating against nine of the world’s major currencies, one could
easily conclude that gold has been an attractive "investment", but appearances
can deceive. Gold does not generate cash flow, so it cannot be an investment.
An ounce of gold purchases the same amount of crude oil as it did 10 years
ago. When viewed this way, gold is not an investment, because it would not
have increased your wealth over these periods. Rather, gold would simply have
preserved your purchasing power.
Because
gold is an element of nature, it is often thought to be a commodity like the
other metallic elements in the periodic table. However, it is fundamentally different
from all commodities for several reasons:
 Commodities
are consumed and, aside from some recycling, disappear after use. Gold does
not disappear. All of the gold mined throughout history still exists in its
above-ground stock – generally estimated to be about 162,000 tonnes.
Commodities
have grades of quality and other distinguishing characteristics, such as
perishability. But all gold is identical, and does not perish, tarnish or
change over time.
Gold has a
very high value to volume. For example, it would take a warehouse room full
of zinc to equal the $760,000 value of one 400oz Good Delivery gold bar
(those traded by the professional market) measuring approximately 25cm x 8cm
x 5cm.
Price
discovery for gold is a global process determined by buyers and sellers of
the physical metal (typically purchased at 1–10% above the value of the
gold content to cover fabrication and handling costs). Physical gold can be
purchased as coins, bars or high-karat jewellery,
with online accounts offering private investors an attractive way of
purchasing physical metal in relatively small amounts.
Investors
can gain exposure to gold price movements in a variety of ways, including
gold exchange-traded funds, other financial products and mining stocks.
Following the launch of the GLD ETF in 2004, more commodity ETFs have entered
the market, trading on a variety of stock exchanges and providing investors
with exposure to the gold price. Traders also deal in gold futures contracts
on regulated commodity exchanges, the largest of which is the New York
Mercantile Exchange Comex Division (now called CME Globex).
The weight
of gold in GLD, the world’s largest gold exchange-traded fund (ETF),
has in fact fallen by 3.8% so far this year. So gold’s price has risen
some 25% in 2011 not because speculators and traders in gold derivatives are
seeking exposure to the gold price, but because buyers are looking for
safety. Whether it is a central bank beefing up its country’s monetary
reserve or an ordinary individual seeking to save for the proverbial rainy
day, the gold buyer is choosing physical metal instead of paper-gold
alternatives.
They
understand that physical gold does not have counterparty risk, which is
something many want to avoid with the world’s banking and monetary
system in such a fragile state. Tidal waves of safety-seeking hot-money add
volatility to gold’s normal price fluctuations, but the long-term trend
toward higher gold prices is clear; higher gold prices are likely until the
present currency and sovereign debt crises are solved.
When the
gold price rises, existing wealth in the form of deferred purchasing power is
moves from a national currency to gold. Gold owners are the winners from the
wealth re-shuffling, while holders of national currency are the losers.
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