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Gold Investment Strategies

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Methods of Gold Investment Strategies

Fundamental Analysis

To analyze situations on a macroeconomic scales, investors use a technique called fundamental analysis. This technique includes international economic indicators such as interest rates, productivity, energy prices, inflation, and GDP growth rates. Investors could also use the technique to analyze the supply versus demand for global gold. The World Gold Council performed a survey and have found that during the year 2005, the supply for gold was 3859 tonnes and the demand was 3,754 tonnes. Which resulted with a surplus of 105 tonnes. There is a reason that makes gold like no other commodity, it is because the supply and demand due to private ownership is very liquid able and is prone to rapid changes. On top of that, gold production is unlikely to change in the near future. The number of investments in gold has increased by 64% in 2014. The increase includes gold bars and coin, and traded funds.

Gold versus Stocks

Gold and stocks are known for their fundamental differences and are often compared with each other. Gold and Stocks are often defined by two characteristics, gold is known as a store of value which means there is no growth, and stocks are known as a return on value which is growth from anticipated real price increase plus dividends. Unlike Gold, stocks are best invested in a calm and stable political climate with strong property rights and small disturbances. An excellent example is shown in the graph below for Dow Jones Industrial Average divided by the price of an ounce of gold. The appreciation of stocks since 1800 were primarily due to the stable American political system. However, the same could not be said about gold. The price of gold peaked in 1980 where the Dow Industrials plateaued at a ratio of 1:1 with gold, and continues to grow until the 1990’s. Coincidently, the invasion of Afghanistan by the Soviet Union and the world threat of spreading communism was occurring at the same time. However, the growth did not continue past January 14, 2000 where it peaked at 41.3 and has been decreased ever since.

Thomas Sowell put up an argument in his Basic Economics book that gold will not hold its value against stocks and bonds in the long term. His main reason being, gold had a higher volatility when compared to stocks and bonds.

If you would compare the value of $1 worth of bonds to $1 worth of gold in 1801 to 1998, the gold would be worth 78 cents while the bonds would be worth close to a thousand dollars. A more extreme example would be to compare $1 worth of stocks, in 1998 it would be worth millions of dollars.

Technical Analysis

A common method for making investment decisions for gold investors is to use technical analysis. A technical analysis can include market trends, the economic cycle, moving averages, analysing chart patterns, all in an effort to predict the future price of gold.

Using Leverage

Some investors make risky investments where they use loaned funds to invest in gold or even use their existing assets to purchase gold. Despite the fact that leverage is an important part of purchasing gold derivatives and unhedged gold mining company shares, leveraging can bring gains but can also increase the risk of capital loss if there is a lack of growth.

Taxation

The taxation on gold provides a unique position in the market. The European Union implemented a rule that any trading involving gold coins and bullion products were to be free of VAT. Other commodities such as silver or other precious metals are not free of VAT.  However, there are capital taxes that could apply depending on their tax residency.

With the growing Gold market, Gold brings its own share of dishonest and deceitful transactions:

Cash for Gold

A very common method for liquidating gold for a low price. These companies have popped up all over the world with the recession in 2007-2010 where the price of gold increased. These companies provide cash in exchange for personal gold accessories or products, and some may even offer investments in gold bullions and coins. They usually use marketing plans that have massive returns and use spokesman like vice presidents. The main reasons for fraudulent activity is the fact that these companies are often involved with stolen gold where the ownership is not verified, and some Cash for Gold companies even launder money for terrorists. Many of them are also under investigation for securities fraud claim.

High yield investment programs

These types of programs are usually a sugar coated pyramid scheme that have no real return. They use gold to make themselves seem more legit and trustworthy.

Advance Fee Fraud

A more advanced form of fraud where someone mass emails people on the internet looking for buyers or sellers of up to 10,000 metric tonnes of gold. These emails will commonly use fluffed terms such as ‘Swiss Procedure’ or ‘Full Corporate Offer’ to lure middlemen as brokers.

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