Gold as an investment
Bullish investors may choose to leverage their position by borrowing money against their existing gold assets and then purchasing more gold on account with the loaned funds. In order to keep the cost of debt to a minimum, these individuals would normally seek a loan in the currency with the lowest borrowing rate, which, as of April 2006, was the Japanese yen. This technique is referred to as a "yen-gold carry trade". Leverage may increase investment gains but increases risk, as, if the gold price decreases, the investor may be subject to a margin call. Leverage is also an integral part of buying gold derivatives and unhedged gold mining company shares (see gold mining companies).
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Gold's value versus money supply
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Historically, increases in the supply of fiat currency through increased money supply have caused the demand for gold to increase. There was a time when gold was money and vice versa. If citizens felt that there may be insufficient gold to cover the paper money in circulation, they would queue up at the bank to change their paper currency back into gold.
However, since the gold standard was ended on August 15, 1971, governments have been free to print as much money as they choose, without fear that their populations will come knocking on the central bank's door demanding to change their paper money back into gold.
In January 1959 US M3 money supply was $288.8 billion [17], and the official gold reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces [18] (there are 32,150.7 troy ounces in a tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the actual ratio of dollars to gold was $518 per ounce, the actual price, as fixed under the gold standard, was only $35 an ounce.
By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces [19]. This means that by 2005, there were $37,831 in circulation for every troy ounce of gold held by the United States.
However, this increase of 75 times in the ratio of central bank gold holdings to debt does not allow for the fact that the gold standard was abandoned in 1971 and gold holdings have been deliberately and considerably reduced. Another far less dramatic way of looking at the same figures is this: In 1959 US government debt valued in gold was 8 billion Troy ounces, in 2005 US government debt was 20 billion ounces gold - an increase of 2.5 times!
The US Federal Reserve ceased publishing M3 data on 23 March 2006, with the last published data indicating a year-on-year growth rate of 8.23%. Central banks may see this as a reason to limit further increases in their reserves of dollars, and thus alternatives such as gold or the euro might be considered.[citation needed] Jon Nadler, an analyst at Kitco Bullion Dealers, said gold was still benefiting from August 30, 2006 release of the minutes to the last rate-setting meeting of the US Federal Reserve. The minutes to the August 8, 2006 meeting, at which the Federal Open Market Committee kept short-term interest rates unchanged for the first time since 2004, supported the view that US borrowing costs have peaked.[20]
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Bulls versus bears
Since April 2001 the gold price has more than tripled in value against the US dollar (as seen here), prompting speculation that this long secular bear market (or the Great Commodities Depression) has ended and a bull market has returned [36] [37]. In March 2008, the gold price increased above $1000 [38], which in real terms is still well below the $850 peak in 1980. In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/Gold ratio (which is inherently inflation adjusted) substantially, in most cases to a value well below 4 (as seen here). During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and silver. The long-term trend in the Dow/Gold ratio since 2001 shows that such a scenario is currently repeating. Major reasons are, among others, the rapid increase in money supply M3 in Europe [39] and the USA [40] [41] (monetary inflation) and the high double deficit of the USA.[42] [43] These severe economic problems have been leading to the financial crisis, high price inflation and the strong depreciation of major currencies against commodities, most notably of the US-Dollar.
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References
- ^ S&P 500 [1]
- ^ Dow Jones Industrial Average [2]
- ^ Money Supply M3 [3]
- ^ Farm Wages [4][5]
- ^ US Govt Debt [6]
- ^ Oregon State University (Conversion Factors applied to listed values)[7]
- ^ Inflation conversion factors for dollars 1665 to estimated 2017 to dollars of 2006 and other years
- ^ a b Howstuffworks "All the gold in the world"
- ^ a b World Gold Council > value > market intelligence > supply & demand > recycled gold
- ^ World Gold Council > discover > gold knowledge > frequently asked questions
- ^ a b c Please login to download > World Gold Council, the information resource for gold, investment, jewellery, science and technology, historical and culture > Please login to download
- ^ Official gold reserves
- ^ 400 tonnes/year
- ^ UK Treasury & Central Bank Gold Sales
- ^ Russia
- ^ A Gold Play on the Dollar's Demise - Seeking Alpha
- ^ Dollar, gold see sharp moves on China's diversification talk - MarketWatch
- ^ The Roosevelt Gold Confiscation Order Of April 3 1933
- ^ Real Rates and Gold - ZEAL
- ^ Real Rates and Gold 9 - ZEAL
- ^ The shameful truth about the CPI - EUROPAC
- ^ Crash Proof: How to Profit From the Coming Economic Collapse by Peter Schiff
- ^ Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market by Jim Rogers
- ^ Gold: The Once and Future Money by Nathan Lewis
- ^ London Stock Exchange - Article
- ^ http://www.gold.org/pr_archive/pdf/GDT_Q3_07_pr.pdf
- ^ GATA
- ^ Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More
- ^ How to Improve Asset Allocation
- ^ Tactical Asset Allocation to Gold
- ^ [8]
- ^ [9]http://www.goldinvestingresource.com
- ^ The Chevreaux Report [10]
- ^ Investments (7th Ed) by Bodie, Kane and Marcus, P.570-571
- ^ Gold, oil reach highs amid U.S. recession fears
- ^ A Bull Market in Gold – Technically Speaking by Mark Thornton
- ^ Gold starts 2006 well, but this is not a 25-year high! | Financial Planning
- ^ 2008 London Gold Fixings
- ^ Monetary developments in the euro area
- ^ Federal Reserve: Money stock measures
- ^ Money supply in the USA, alternate data series
- ^ CIA: Rank order - current account balance
- ^ Double deficit in the USA
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See also
- Diamonds as an investment
- Silver as an investment
- Palladium as an investment
- Platinum as an investment
- Full-reserve banking
- Gold exchange-traded fund
- Methods of investing in gold
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External links
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