MUMBAI (Commodity Online): Demand for gold is widely spread around the world. And people are buying gold like never before following the recession. East Asia, the Indian sub-continent and the Middle East account for almost 70% of world demand.
Around 55% of demand is attributable to just five countries — India, Italy, Turkey, USA and China — each market driven by a different set of socio-economic and cultural factors.
So, people who want to invest their money in gold now are scurrying for proper advice on how to put their money in the yellow metal.
Here are a few steps for you to invest your money in gold. Gold investment can take many forms, and some investors may choose to combine two or more of these for flexibility. The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear, especially since it has always been possible to invest in bullion without actually taking physical delivery.
If you are thinking about investing gold, it is worth giving the same consideration to your purchase as you would to any other investment.
COINS AND SMALL BARS
The first gold coins were struck by King Croesus, ruler of Lydia in western Asia Minor from 560 to 546BC, whose wealth came from the gold from the mines and sands of the River Pactolus. Gold coins have been legal tender ever since. Bullion coins and small bars offer private investors an attractive way of investing in relatively small amounts of gold. In many countries, including the whole of the European Union, gold purchased for investment purposes is exempt from Value Added Tax.
Investors can choose from a wide range of gold bullion coins issued by governments across the world. These coins are legal tender in their country of issue for their face value, rather than for their gold content. For investment purposes, the market value of bullion coins is determined by the value of their fine gold content, plus a premium or mark-up that varies between coins and dealers. The premium tends to be higher for smaller denominations. Bullion coins range in size from 1/20 ounce to 1000 gm, although the most common weights (in troy ounces of fine gold content) are 1/20, 1/10, 1/4, 1/2 and 1 ounce. It is important not to confuse bullion coins with commemorative or numismatic coins, whose value depends on their rarity, design and finish rather than on their fine gold content. Many dealers sell both.
Gold bars can be bought in a variety of weights and sizes, ranging from as little as one gram to 400 troy ounces (the size of the internationally traded London Good Delivery bar). Small bars are defined as those weighing 1000g or less. According to industry specialists Gold Bars Worldwide, there are 94 accredited bar manufacturers and brands in 26 countries, producing a total of more than 400 types of standard gold bars between them. They normally contain a minimum of 99.5% fine gold. The Gold Bars Worldwide website provides a wealth of additional information regarding the international gold bar market.
EXCHANGE-TRADED GOLD
Gold is traded in the form of securities on stock exchanges in Australia, France, Hong Kong, Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the United States. By design, these forms of securitised gold investment, all regulated financial products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds (ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the securities are 100% backed by physical gold held mainly in allocated form. These securities have had a major impact on the gold market, representing 38% of identifiable investment and 7.5% of total demand in 2007. Financial advisors and other investment professionals can provide further details about these products.
GOLD FUTURES
Gold futures contracts are firm commitments to make or take delivery of a specified quantity and purity of gold on a prescribed date at an agreed price. The initial margin - or cash deposit paid to the broker - is only a fraction of the price of the gold underlying the contract. That means investors can achieve notional ownership of a value of gold considerably greater than their initial cash outlay. While this leverage can be the key to significant trading profits, it can also give rise to equally significant losses in the event of an adverse movement in the gold price. Futures prices are determined by the market's perception of what the carrying costs - including the interest cost of borrowing gold plus insurance and storage charges - ought to be at any one time. The futures price is usually higher than the spot price for gold. Futures contracts are traded on regulated commodity exchanges. The largest are the New York Mercantile Exchange Comex Division (recently rebranded CME Globex, after a merger between Chicago Mercantile Exchange and NYMEX), the Chicago Board of Trade (part of CME) and the Tokyo Commodity Exchange. Gold futures are also traded in India and Dubai.
The Commodity Futures Trading Commission provides extensive reports on derivatives trading in the United States. Tradable commodity indices are based on fully collateralised baskets of long-only commodity futures, all of which include a small allocation to gold.
These give the holder the right, but not the obligation, to buy ('call' option) or sell ('put' option) a specified quantity of gold at a predetermined price by an agreed date. The cost of such an option depends on the current spot price of gold, the level of the pre-agreed price (the 'strike price'), interest rates, the anticipated volatility of the gold price and the period remaining until the agreed date. The higher the strike price, the less expensive a call option and the more expensive a put option. Like futures contracts, buying gold options can give the holder substantial leverage. Where the strike price is not achieved, there is no point in exercising the option and the holder's loss is limited to the premium initially paid for the option. Like shares, both futures and options can be traded through brokers.
In the past, gold warrants were mostly related to the shares of gold mining companies. Nowadays commonly used by leading investment banks, they give the buyer the right to buy gold at a specific price on a specific day in the future. For this right, the buyer pays a premium. Like futures, warrants are generally leveraged to the price of the underlying asset (in this case, gold), but gearing can also be on a one-for-one basis.
GOLD ACCOUNTS
Gold bullion banks offer two types of gold accounts - allocated and unallocated:
Effectively like keeping gold in a safety deposit box, allocated account is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository. Specific bars (or coins, where appropriate), which are numbered and identified by hallmark, weight and fineness, are allocated to each particular investor, who pays the custodian for storage and insurance. The holder of gold in an allocated account has full ownership of the gold in the account, and the bullion dealer or depository that owns the vault where the gold is stored may not trade, lease or lend the bars except on the specific instructions of the account holder.
In unallocated accounts, investors do not have specific bars allotted to them (unless they take delivery of their gold, which they can usually do within two working days). Traditionally, one advantage of unallocated accounts has been the lack of any storage and insurance charges, because the bank reserves the right to lease the gold out. Now that the gold lease rate is negative in real terms, some banks have begun to introduce charges even on unallocated accounts. Investors are exposed to the creditworthiness of the bank or dealer providing the service in the same way as they would be with any other kind of account. As a general rule, bullion banks do not deal in quantities under 1000 ounces - their customers are institutional investors, private banks acting on behalf of their clients, central banks and gold market participants wishing to buy or borrow large quantities of gold.
GOLD POOL ACCOUNTS
There are alternatives for investors wishing to open gold accounts holding less than 1000 ounces. For instance, in Gold Pool Accounts - where you have a defined, unsegmented interest in a Gold accounts pool of gold - you can invest as little as one ounce.
ELECTRONIC CURRENCIES
There are also electronic 'currencies' available - linked to gold bullion in allocated storage - which offer a simple and cost-effective way of buying and selling gold, and using it as money. Any amount of gold can be purchased, and these currencies allow gold to be used to send online payments worldwide.
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 jewellery. Should they choose to sell their gold they can also get cash.
GOLD CERTIFICATES
Historically, gold certificates were issued by the U.S. Treasury from the civil war until 1933. Denominated in dollars, these certificates were used as part of the gold standard and could be exchanged for an equal value of gold. These U.S. Treasury gold certificates have been out of circulation for many years, and they have become collectibles. They were initially replaced by silver certificates, and later by Federal Reserve notes.
Nowadays, gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries like Germany and Switzerland, they confirm an individual's ownership while the bank holds the metal on the client's behalf. The client thus saves on storage and personal security issues, and gains liquidity in terms of being able to sell portions of the holdings (if need be) by simply telephoning the custodian.
The Perth Mint also runs a certificate programme that is guaranteed by the government of Western Australia and is distributed in a number of countries.
No comments:
Post a Comment