Introduction: History of money
This investor’s guide is destined for anyone interested in gold, silver, and the history of money. In it you will find the key elements to help you assimilate the inner workings of the market, who are the players, the reasons why they buy and sell gold and how they do it. We have used several supports (articles, charts, interviews, videos with simple explanations) that will help you understand the gold market and the different solutions offered for investing in gold and silver.
In times of economic and monetary crises, such as we are going through presently, the savvy investor buys gold to protect his wealth. He knows that gold has played its role of reserve of value for thousands of years. He understands that the level of debt has reached epic proportions that make it impossible to reimburse and that, in such a complex and interconnected financial system, default from one of the major players in the economy (financial institution, State...) could trigger a systemic collapse. So, rationally, he turns toward tangible and liquid assets that are neither backed by debt or the responsibility of a third party: precious metals.
The gold price keeps evolving continually, five days a week, around the world, from the open of the Asian market on their Monday morning (Sunday 9pm CET) to the close of the American market on their Friday night (9:30pm). A benchmark price, called ‘the fixing", is determined twice a day. According to Erwin Lubbers’ estimates, published on his goldresearcher.com website, the daily volume of combined paper and physical gold was of 139 million ounces in 2013, worth $196 billion.
If we compare the trading volume of the GOLD:USD pair to the other pairs, USD:EUR, USD:JPY, this puts gold as the sixth most traded currency every day.
Recently, several indicators such as, notably, the GOFO rate turning negative and the important deliveries on the Shanghai Gold Exchange are signalling important stress on the physical gold market.
There are several ways to invest in precious metals, and the simplest and safest way is to buy bars and coins. It is also possible to invest in “paper gold” financial instruments.
These financial products, such as ETF funds, futures, certificates and gold mining stock are generally recommended by banks and destined for speculation. They are to be invested in with a risk/reward perspective. The fees on those products are minimal since they require little administrative work and very little handling. However they do not offer the same guarantees as physical gold and expose you to intermediation and, thus, counterparty default risk, such as your bank or your broker defaulting.
When buying gold, one looks for an easily identifiable and tradable product. Hence refiners produce marketable gold bars and gold coins which weight, purity and brand are inscribed on them. Prices are determined by their weight in gold, to which is added a premium for refining and producing. The smaller the bar or the more detailed a coin is, the higher the premium. For example, the premium on "Good Delivery" 400oz bars traded on the international market is lower than the premium on the 1kg bars. However, for the private investor, the 1kg bar is much more practical and offers more liquidity.
Here you will find more information on marketable gold buying/selling.
All investors are pondering this question. There is no universal answer and it will depend on your capital and the liquidity you’re looking for. As an investor, you want to accumulate as much metal as possible and you will look for products offering the most attractive premiums. You must also take into account the fact that you may be in need of liquidity in the future, and that a partial resale of your precious metals might be necessary.
Let's take a simple example:
Mr. X has decided to buy 100,000 euros worth of gold. The most attractive bar is the 1kg bar, and it comes with a 1.5% commission. With the current spot price of 989 euros the ounce (January 1st, 2015), the buying price, including commission, is 32,472 euros per kilogram.
Mr. X can buy three kilograms for 97,416 euros. But here, he’s not getting optimal liquidity, since if he needs 10,000 euros quickly in the future, he will have to sell 1 kilogram, the equivalent of 32,472 euros, and pay a commission on this amount. He will surely want to re-invest the remaining 22,472 euros and will have to pay another buying commission.
A better allocation of his capital would be as follows :
The total amount invested would be 97,421 euros and a portion of the remaining money would cover eventual storage or delivery fees.
Once you have determined which gold bars or coins you will buy, an essential question remains: Where to store them? There are several solutions available, but one must privilege a maximum of safety and liquidity.
Storing precious metals in your home is the least costly solution, but it exposes you to the risk of theft. We advise against storing in your home precious metals exceeding 10,000 euros in value. And, in the case of a gold owner passing away, it frequently happens that no one knows about this hidden gold (e.g. gold buried in a garden). Also, to ensure discretion about your precious metals purchases, we recommend taking delivery at a vault or using a home delivery service. Depending on the size of your purchase, delivery can be done by classic private companies, such as DHL, or secure transportation companies (unmarked vehicle and deliveryman).
One usually rents a safe deposit box in a banking institution. While being economical, it does not include insurance for the contents, often kept “secret”. This solution entails a few problems: What would happen, for instance, if the contents of the safety box were to disappear? One shouldn’t exaggerate the frequency of these incidents but, nevertheless, a safety box does not represent an absolute guarantee. What would happen if your bank were to go bankrupt or in the case of a political or financial crisis? How could you access your safety box if there were a bank holiday? You may not be able to get hold of your gold at a time where you would need it most. There are a few private companies that rent safety boxes to individuals without being banks, which constitutes a better option, but insurance problems remain.
Bullion banks do not directly store precious metals; they use the services of partner companies specialised in logistics and security. Those are international companies, so it allows investors the choice between very safe jurisdictions such as Switzerland, Toronto, New York or Singapore. Safekeeping gold in professional storage units guarantees its traceability and facilitates its resale. Indeed, having never gotten out of the professional circuit, the origin of the precious metals is guaranteed.
Among these solutions, one must distinguish:
Mutualized gold : Investors buy fractions of a bar. Although the investment is backed by physical gold, the bar is not allocated to one investor.
Allocated gold: An investor owns bars allocated at 100%. He has total and direct control on his bar(s). A storage certificate is issued under his name and lists all the bars and their characteristics (serial numbers, weight, refiner’s name, fineness). The investor also has a personal storage account in his name with the secure storage company. He stores his gold in his own name: there is no intermediation between the investor and his precious metals, whether in regards to ownership or storage.)
Here you will find a more detailed explanation on the difference between direct ownership and mutual ownership.