How and Why to Invest in Gold??

Gold has been the commodity which is termed as the best way of exchange for the time immemorial. It has been used international medium of exchange between nations, culture and civilizations. Every individual has used gold as a store of wealth and insurance against all odds. It is used as the insurance against the fluctuations and depreciation of the paper money and to protect against Macro Economic, Geopolitical situation and other international issues.

Throughout the history of man, gold and other precious metal has been one of the deciding factor for the economy and business. From the Greek empire, Ottoman Empire and Mughal Era in India; everyone has their significant role in Numismatics and precious metal trading. Earlier balance of payment has been done through these precious metals.

This unpredictable and unstable market has made bullion trading more interesting. There is bearish trend all around the world. People are facing big time challenge from market from China, India, Japan, USA and London. Gold and silver are trading all-time low. There is some correction or appreciation in prices after no change in Federal Reserve Rates.

Seeing this present situation and global turmoil it is always advisable to diversify your investment. Rather in simple terms don’t put all your eggs in one basket. Once the economy tumbles then all your eggs will be broken then it is always advisable to diversify your investment and diversify your risk.

Following is the Investment Chart as per the Risk factor:

INCREASING

RIS

Foundation or Elementary investment Gold Bullion Silver Bullion

Security Cash Deposits Term deposits Money market funds Annuities, Treasury

BillsIncome Blue chip stocks

Commercial properties

Residential properties Corporate bonds Government bonds

Growth Small cap stocks Large cap stocks

K Equity mutual FundsSpeculation Options

Futures Spread betting Forex trading

So as it is clear from the above chart that for the healthy portfolio we have to distribute our funds as per our need and our risk capacity. Person can choose from different options available for him. We should always choose our portfolio based on the macroeconomic, geopolitical, industry perspective and many other factors. I will discuss all these options later on in my different articles.

It is always advisable to keep at least 5% to 20% investment in gold bullion and gold related investment. Market thumb rule for investment is person should have 10% of his investment as gold bullion and gold related investment. If we will watch the market for the past 100years we will come to know that whenever market is in recession or in turmoil only commodity which has appreciated is Gold. We can see the chart for the gold prices and relation with market for the past 100 years.

If we see the chart whenever there is recession Gold prices has appreciated a lot. The recent example is during 2008 recession when there was peak in gold price.

One can decide for investing in gold based on their preference, mostly we come across following preferences based on people need and risk taking capacity.

Are you diversifying or saving gold and gold bullion as a financial stability? Are you investor, speculator or trader? What is your term for investment i.e. long, medium or short?

Based on our requirement we can invest in physical gold through following;

Gold Bullion Bars Numismatic Gold Coins Modern bullion coins Gold accumulation plan (Gold Saving plan) Gold Certificates Allocated accounts for Gold E Gold (Digital Gold Currency)

Apart from these physical golds we can invest in gold through paper golds which is as follows;

Exchange Traded Funds (ETFS) Gold Stock and Gold Stock options Gold Future options Spread betting

Gold Bullion Bars:

A gold bar, also called a “gold ingot” or “gold bullion”, is a quantity of refined metallic gold of any shape that is made by a bar producer meeting standard conditions of manufacture, labeling, and record keeping. Investor mostly invest in gold bullion bar. Which have different weight and purification. Actually these bullion bars range between 0.90 to 0.9999 purification in 24 karat gold.

There are world renowned refineries which provide gold bars most famous are Swiss based refineries. Now a days these gold bars are laminated in tamper proof laminated display card which provide details of gold. Mostly prices matches with the prices of London Spot market.

The standard gold bar held as gold reserves by central banks and traded among bullion dealers is the 400-troy-ounce (12.4 kg or 438.9 ounces) Good Delivery gold bar. The kilo bar, which is 1000 grams in mass (32.15 troy ounces), is the bar that is more manageable and is used extensively for trading and investment. The premium on these bars when traded is very low over the spot value of the gold making it ideal for small transfers between banks and traders. Most kilo bars are flat, although some investors, particularly in Europe, prefer the brick shape.

Numismatic Gold Coins & Modern Bullion Coins:

Precious metals in bulk form are known as bullion, and are traded on commodity markets. Bullion metals may be cast into ingots or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. While obsolete gold coins are primarily collected for their numismatic value, gold bullion coins today derive their value from the metal (gold) content — and as such are viewed by some investors as a "hedge" against inflation or a

store of value. Many nations mint bullion coins. According to British HM Revenue & Customs investment coins are generally coins that have been minted after 1800, have a purity of not less than 900 thousands and is or has been a legal tender in its country of origin. Although nominally issued as legal tender, these coins face value as currency is far below that of their value as bullion.

The European Commission publishes annually a list of gold coins which must be treated as investment gold coins in all EU Member States. The list has legal force and supplements the law. In the United Kingdom, HM Revenue and Customs have added an additional list of gold coins alongside the European Commission list. These are gold coins that HM Revenue & Customs recognize as falling within the exemption for investment gold coins. This second list does not have legal force.

Gold, silver and platinum are all available in the form of bullion coins, minted in Australia, the UK, and the US, Canada, South Africa, Austria, China and other countries. The most popular bullion coins in the world are American Eagles from the US Mint, Australian Kangaroos from the Perth Mint, Sovereigns and Britain from the Royal Mint (UK), Maple Leafs from the Royal Mint of Canada, Philharmonics from the Austrian Mint, and Krugerrands from the South African Mint and Pandas from the People's Republic of China Mint.

Gold bullion coins usually come in 1 oz., 1/2 oz., 1/4 oz., 1/10 and 1/20 oz. sizes. Most countries have one design that remains constant each year; others (such as the Chinese Panda

coins) have variations each year, and in most cases each coin is dated. A 1/10 oz. bullion coin is about the same size as a U.S. dime. A 1 oz. gold bullion coin is about the size of a U.S. half dollar.

The largest legal tender gold coin ever produced was unveiled in 2012 by the Perth Mint in Western Australia. Known as the "1 Ton Gold Kangaroo Coin" and with a face value of one million dollars, it contains one metric ton of 9999 pure gold, and is approximately 80 cm in diameter by 12 cm thick.

Gold accumulation plan (Gold Saving plan):

“Gold Accumulation Plan" “Gold Saving Plan” is a service for customers who open Gold Accumulation Plan accounts in broker houses and sign the accumulation agreement to buy gold asset equity in regular periods (monthly deduction in agreed amount) or at own choices. The equity can be redeemed or converted into physical precious metal.

Buying gold in batches in small amount continuously can reduce the risks caused by large investment at improper time. Investors can redeem physical precious metal any time within the contract period (usually a year at least) or when the account is closed. Cash can be drawn at the price of the day if investors decide to sell accumulated gold. This type of plan is more famous in developing countries like China and India.

Gold Accumulation Plan is the first low-risk gold investment product for customers to accumulate "based on average daily prices". Customers can spread investment cost effectively and avoid the risks caused by gold price fluctuation to the largest extent.

(1) Hold more gold steadily: Team of experts buys gold everyday based on the preferred daily prices to help you spread the cost and risk.

(2) Amass by regular small investments: Minimum amount needed per month, small capital but large investment.

(3) Many options: Customers can redeem rich variety of precious metal products, or draw cash. Redemption of accumulated gold means accumulated gold in the account can be redeemed into other kinds of precious metal products of equivalent value currently sold by brokers. Balance in the Gold Accumulation Plan account will be reduced accordingly.

(4) Earn actual gold: Continual investment in gold can bring you more wealth.

The world’s largest commercial bank, Industrial and Commercial Bank of China (ICBC) and the World Gold Council launched the first gold accumulation plan in China. Over one million accounts had already opened in 2010 alone. India recently saw the launch of its first gold accumulation plan. The World Gold Council, the market development organization for the gold industry, launched it in conjunction with Reliance Capital.

Gold Certificates:

A gold certificate in general is a certificate of ownership that gold owners hold instead of storing the actual gold. It has both a historic meaning as a U.S. paper currency (1863–1933) and a current meaning as a way to invest in gold.

Banks may issue gold certificates for gold that is allocated (non-fungible) or unallocated (fungible or pooled). Unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuing bank's gold on deposit. Allocated gold certificates should be correlated with specific numbered bars, although it is difficult to determine whether a bank is improperly allocating a single bar

to more than one party.

Since the time of the gold recall legislation the United States Treasury has issued gold certificates to the Federal Reserve Banks. The Secretary of the Treasury is authorized to "prescribe the form and denominations of the certificates". Originally, this was the purpose of the Series of 1934 Certificates which were issued only to the banks and never to the public. However, since the 1960s most of the paper certificates have been destroyed, and the currently prescribed form of the "certificates" issued to the Federal Reserve is an electronic book entry account between the Federal Reserve and the Treasury. The electronic book entry system also

allows for the various regional Federal Reserve Banks to exchange certificate balances among themselves.

Allocated accounts for Gold:

An ‘allocated’ gold account is where a customer has his gold physically segregated and is given a detailed list of the weights and assays of his gold. The gold is held in the customer’s name and owned by him still. In this case his gold cannot be taken by the Custodian or bank’s creditors should the bank go bust. The gold would, in that case be moved on the instructions of the beneficial owner.

Please note, though, that the clients of UBS and Credit Suisse have been ‘offered’ allocated accounts, they had not requested them. ‘Allocated’ accounts are more costly so it is no surprise that the costs of storing customer’s gold has risen 20%.

Allocated gold accounts allow an investor to buy gold coins and bars from a bullion brokerage which will transfer or ship the bullion to an individual's account in a depository or bank. Allocated accounts involve ownership of specific gold and the owner has title to the individual coins or bars. Due diligence should be done on allocated gold account providers and the history, financial standing, credit rating and security of the provider is of vital importance.

E Gold (Digital Gold Currency):

Digital Gold Currency, gold grammes or e-gold are also increasingly popular. There are no specific financial regulations governing DGC providers, so they operate under self-regulation. DGC providers are not banks and therefore do not need to comply with bank regulations and there are concerns that there are unscrupulous operators operating in this emerging sector.

However, two of the more respected providers who have rightly garnered trust are Bullion Vault and Gold Money. They offer allocated accounts where gold can be instantly bought or sold just like any foreign currency. Every gold bar is audited and accounted for and it is thus considered a safe way to own bullion. Digital gold is primarily used by clients to buy gold for saving or as an investment and/ or as electronic money amongst users.

Investment in Paper Gold:

The term paper gold means you have a piece of paper acting as a substitute for the physical gold. With paper gold, you don't own the gold; you own a promise to receive physical gold. In plain English, it means you are a creditor of the corporation issuing the paper gold certificate, thus subject to counterparty risks. Owning the physical gold has no counterparty risk and is fully under your control.

Examples of paper gold are gold certificates issued by banks and mints, pool accounts,

futures accounts and the NYSE listed exchange-traded fund. With these products you own a piece of paper rather than physical gold. These paper products give you exposure to the gold price; you can make a profit by selling them to someone wishing to own paper gold, however when the music stops and nobody wants to purchase paper anymore, it becomes worthless since you may not able to redeem your metal.

Paper gold includes gold futures, gold futures options, some gold ETFs, certain forms of unallocated gold ownership, pool accounts, contracts for difference (CFDs), spread betting contracts, gold stocks and or gold options

Exchange Traded Funds (ETFS):

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.

Advantages of ETFs

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share (there are no minimum deposit requirements). Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order.

There exists potential for favorable taxation on cash flows generated by the ETF, since capital gains from sales inside the fund are not passed through to shareholders as they commonly are with mutual funds.

Gold Stock, Gold Stock options and Gold Future Options:

Gold stocks are not gold – rather they are shares in gold mining companies. If the gold price rises, profits of a gold mining company should rise and as a result the share price should rise. There are many factors to take into account and it is not always the case that a share price will rise when the gold price increases. It

is important to consider the performance and abilities of the management, auditors and geologists; the conduct of trade unions; a company's gold hedging position; whether it is producing or exploring; its cost basis; how much reserves it has in the ground and whether it is subject to political, economic, nationalization or environmental risk.

Individual gold shares would be regarded as very volatile and high risk. Gold shares are regarded as more speculative as there is a higher risk-reward scenario. However, the added risk can be compensated for by the leverage which can result in higher returns. Such higher returns would be expected from mid and large-capitalization un-hedged senior gold mining companies with proven reserves and strong earnings which have strong balance sheets and growth in resources and production and effective company management.

Gold options are option contracts in which the underlying asset is a gold futures contract. The holder of a gold option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying gold futures at the strike price.This right will cease to exist when the option expire after market close on expiration date.

Gold option contracts are available for trading at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Gold option prices are quoted in dollars and cents per ounce and their underlying futures are traded in lots of 100 troy ounces of gold.

TOCOM Gold options are traded in contract sizes of 1000 grams (32.15 troy ounces) and their prices are quoted in yen per gram.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes

NYMEX Gold Options 100 oz(Full Contract Specs)

American Calls | Puts

TOCOM Gold Options 1000 gm(Full Contract Specs)

American Calls | Puts

They are normally the preserve of some mining companies, speculators, hedge funds and institutions. The leverage makes them a high risk to high reward speculation. Participants are either hedging the gold price or attempting to predict whether the value of gold will rise or fall in the short term. Gold futures contracts are valuable trading tools for commercial producers and users of the metal to hedge their price risk.

Success depends on the price movement of gold during the contract term. Traders in these markets without protective stop-losses can quickly find themselves on the wrong side of a fast moving trade, losing large sums of money. Part of the risk is due to the leverage involved which can result in a speculator losing more than their initial capital outlay. Therefore, futures markets are not for amateurs or novice investors.

Spread Betting:

Leveraged exposure to precious metals can also be got from Contract for Difference (CFD) and from spread betting. Rather than actually buying physical gold bullion, both financial products allow a trader to make a 'bet' or a 'contract' based on the price of the underlying security or asset itself. This allows traders to profit from both upward and downward movements in price. Both products are also margin products, which means traders gain leverage or gearing on their trades and only have to put up a fraction of the full deal, enabling you

to make – or lose – a lot more money. No commissions or taxes are levied in most jurisdictions on spread betting and CFDs.

The advantages are that any gains are CGT free and one can also take a view on movements in

either direction. The downside is that in a spread bet the spread can be high, your exposure is geared up and short term bets are risky as it is extremely difficult to forecast any markets short term movement. One can lose more than the initial capital thus they are for speculators with very short term horizons rather than investors.

Gold Investment Pyramid:

Source: Google

Assess your option:

Type of Investment Initial Cost of investment

Type of investor

Comment

Gold bullion Bars Medium Diversifier Physical Delivery of Gold is possible. We can keep it at home, office and with the depository. Before keeping in depository we should take care of solvency and credit rating of Depository.

Semi Numismatics High Diversifier/ Speculator

Physical delivery is possible. Before purchasing this do enough market research on prices and quality as premium vary with the company and quality.

Gold Accumulation plan/ Gold Saving Plan

Low to medium

Diversifier There is option of physical gold is always possible. It is suitable for the low income group who wants to save over the period of time. It is possible with some of the depository and banks.

Gold Certificate Medium Diversifier Physical delivery of gold is possible. For investment we should consider the company with good credit rating and govt. bond.

Allocated Account for Gold

Medium to high

Diversifier Gold is purchased on behalf of owner and sent it to the depository. It is more costly for the customer.

E Gold (Digital Gold Currency)

Low Diversifier / Speculator

Some people prefer to take gold. It is suitable for the low income group to start. It depends on the technology i.e. internet, website, servers etc.

Exchange Traded Funds

Low Speculator It is basically suitable for speculators. Annual maintenance charge is more in this. Here investors own share in the trust not on the physical gold.

Gold Stock and Gold Future

Low Speculator In Gold Future, we have option of getting physical gold. It is only suitable for Gold speculators. In this there is risk of market volatility so we have to take care of the market. It involves risk of leverage. It requires advice from the professionals.

Spread Betting Medium Speculator It is only suitable for the speculators. It involves high risk as it is involved with leverage. Need to monitor the prices fluctuations. Need expert advice in investing.

Conclusion:

We have seen in above paragraph that having the portfolio in gold is always better. This is the commodity which serves as the insurance or hedge in the financial market when turmoil is there. A person can diversify his portfolio based on his need and risk appetite. A person can be a speculator, a trader and a general public who is here to save for the future. With experience and expert advice we can have benefit of Gold.

I would like to end my article with famous American Proverb;

“Handful of Gold, is a heart of Iron.”

Keep learning and invest in gold for the future.