With gold prices continuing to fall (12% for the year so far as of the writing of this post), many people are questioning whether it’s a good time to buy gold as an investment. A little background to the factors that affect the price of gold may help you decide.
Gold’s Properties and Uses
Contrary to what many people believe, gold in its pure state (24 karat) is soft and malleable. A single ounce of gold can actually be beaten into a thin sheet as big as 5 square meters!1
The jewelry industry loves gold, not only for its color, shine, and ability to withstand tarnish but for its malleability as well. However, in order for gold jewelry to hold up to the wear and tear of everyday living, it has to be blended (alloyed) with other metals such as copper and silver.
Another feature that makes it attractive for industrial purposes is its ability to conduct electricity. Do you own a cell phone, desktop, or tablet? If you do, then you probably own a little gold. Gold transmits digital information better than any other precious metal2. For example, a thin gold plating is used in microprocessors and memory chips.
Gold is also used in heat shields. If you look at some pictures of NASA astronauts, take a close look at their visor. Notice the gold tint? That’s because the visors have a thin film of gold to help reflect the solar radiation in space. Some buildings also use windows treated with gold to help reflect the solar radiation during the summer months. Likewise, the gold treated windows help to keep buildings warm during the winter by reflecting the internal heat inward.
Because it is tarnish-resistant, gold leaf is frequently used as a decorative feature on everything from furniture and picture frames to the gold domes on buildings. Despite the illusion of wealth and prestige that a gold dome portrays, the gold itself is not worth as much as the cost of the skilled artisans hired to apply it.
Surprising to many people, gold is also used in medicine. Radioactive gold can be implanted in certain tissues to help treat specific cancers. It can also be used to assist with diagnoses.
Dentists and dental labs around the world have a long history of using gold in dental applications. It’s chemically inert, non-allergenic, and easy to shape, making it ideal for creating fillings, crowns, and bridges. The earliest known discovery of gold in dental work dates back to 700B.C.!
Gold also has a long history in commerce. It’s been used for over 6,000 years for barter. When paper money grew in popularity, governments frequently backed their paper money with gold. While this practice is no longer common, it shows how historically, gold was viewed as a commodity that held its value well.
While gold coins (like the American Eagle) are no longer used for trade, they are used as a way for investors to own small amounts of gold.
Who Buys Gold?
Jewelers account for 50% of the gold buyers. 40% is purchased by investors (which can include individuals, central banks, and exchange-traded funds that are required to hold a certain percentage). The remaining 10% comes from a myriad of industrial uses (everything from dentistry to tech gadgets).
Why is Gold Valuable?
Historically, gold holds its value well. According to the inflation-adjusted chart below, it certainly has peaks and troughs, however since 2000, gold has turned in a solid performance. There are several reasons for this.
Gold is frequently viewed as a global barometer. When uncertainty rises, the demand for safe-haven investments increases. Likewise, during periods of extreme inflation, such as during the 1970’s in the US, led investors to flock to gold. Gold still represents safety to many investors.
Gold is still a limited resource that is difficult to extract. Typically, it is a by-product of mining for other metals such as silver and copper. Mines are difficult to start – they are risky and expensive, frequently taking several years before they become profitable. This keeps the gold supply fairly stable over time.
How to Invest in Gold
There are several ways to invest in gold, each depending on your threshold for risk.
Buying Gold Jewelry
Technically, buying jewelry could be considered an investment in gold, however, there are a lot of drawbacks. Jewelry uses gold at differing purities (typically ranging between 10-18 karats) because pure gold is too soft. The purchaser has to be careful to buy items at the higher end to be considered a useful investment. In addition, much of the value of gold jewelry is in the artistic design of the piece. In other words, the price reflects its value as a collector’s item – more like a work of art rather than a commodity.
Coins, Bullion, and Bars
There are different types of gold coins: numismatic and gold bullion. Numismatic coins are collectibles and their values rise and fall based on supply and demand for each particular coin.
The price for bullion, on the other hand, is more closely tied to the spot price of gold. There is, however, a small markup whether you are buying a coin (such as the American Eagle) or selling it. As long as the coins are stored in a safe place, this is a good way to invest in gold especially if you prefer to have it physically in your possession.
Exchange Traded Funds
ETF’s have grown in popularity and present an alternative way to invest in gold without actually having to own the physical metal. An example of a gold ETF is SPDR Gold shares which purchases gold directly on behalf of shareholders. Make sure to do your research and compare the management fees for each fund. The main benefit of a gold ETF is the relative ease of entering or closing a position.
While futures represent another way to own gold without actually holding the metal physically, it is one of the riskiest and complicated investment vehicles due to the high degree of leverage. The way it works is that the value of your contract will rise and fall along with the value of gold; however a futures contract has a definite end date and because of the leverage involved, your profits and losses are amplified. Futures are generally not recommended for a typical investor looking to add a little exposure to gold.
Investing in mining stocks allows for a slightly less direct exposure to gold. Mines are, of course, businesses so they can generate more growth than say that one-ounce American Eagle tucked in your sock drawer. However, mines also carry a degree of uncertainty. There are the costs associated with mining, production fluctuations, mining accidents, as well as potential strikes by workers. If you happen to find a mining company that has solid fundamentals and you expect the price of gold to be going up, this may just be the perfect investment for you.
A good way to diversify your position in gold is to invest in a mutual fund that specializes in gold miners. This allows you some protection in the event that one mining company in the portfolio does poorly, it will have a minimal effect on your investment. It is advisable to spend some time researching the fund before investing. Watch for the management fees as well as what other metals the fund is exposed to (the fund may invest in other precious, semi-precious, or base metals as well).
Timing and Allocation
Trying to time your entry into a gold investment is a challenge. Many financial experts suggest maintaining a 10% allocation of gold in your portfolio and purchasing in small increments to take advantage of dollar cost averaging.
Metal Exchange at Cora Refining
We can help you get a start on your gold investment. When you send your dental crowns and bridges to Cora Refining, part of your payment can be in gold coins. Slowly, you can build up your gold investment. Let us know if you have any questions about how our metal exchange program works.