With gold appreciating against nine of the world's major currencies, one could easily conclude that gold has been an attractive "investment", but appearances can deceive. Gold does not generate cash flow, so it cannot be an investment. An ounce of gold purchases the same amount of crude oil as it did 10 years ago. When viewed this way, gold is not an investment, because it would not have increased your wealth over these periods. Rather, gold would simply have preserved your purchasing power.
Because gold is an element of nature, it is often thought to be a commodity like the other metallic elements in the periodic table. However, it is fundamentally different from all commodities for several reasons:
- Commodities are consumed and, aside from some recycling, disappear after use. Gold does not disappear. All of the gold mined throughout history still exists in its above-ground stock - generally estimated to be about 162,000 tonnes.
- Commodities have grades of quality and other distinguishing characteristics, such as perishability. But all gold is identical, and does not perish, tarnish or change over time.
- Gold has a very high value to volume. For example, it would take a warehouse room full of zinc to equal the $760,000 value of one 400oz Good Delivery gold bar (those traded by the professional market) measuring approximately 25cm x 8cm x 5cm.
Price discovery for gold is a global process determined by buyers and sellers of the physical metal (typically purchased at 1-10% above the value of the gold content to cover fabrication and handling costs). Physical gold can be purchased as coins, bars or high-karat jewelry, with online accounts offering private investors an attractive way of purchasing physical metal in relatively small amounts.
Investors can gain exposure to gold price movements in a variety of ways, including gold exchange-traded funds, other financial products and mining stocks. Following the launch of the GLD ETF in 2004, more commodity ETFs have entered the market, trading on a variety of stock exchanges and providing investors with exposure to the gold price. Traders also deal in gold futures contracts on regulated commodity exchanges, the largest of which is the New York Mercantile Exchange Comex Division (now called CME Globex).
The weight of gold in GLD, the world's largest gold exchange-traded fund (ETF), has in fact fallen by 3.8% so far this year. So gold's price has risen some 25% in 2011 not because speculators and traders in gold derivatives are seeking exposure to the gold price, but because buyers are looking for safety. Whether it is a central bank beefing up its country's monetary reserve or an ordinary individual seeking to save for the proverbial rainy day, the gold buyer is choosing physical metal instead of paper-gold alternatives.
They understand that physical gold does not have counterparty risk, which is something many want to avoid with the world's banking and monetary system in such a fragile state. Tidal waves of safety-seeking hot-money add volatility to gold's normal price fluctuations, but the long-term trend toward higher gold prices is clear; higher gold prices are likely until the present currency and sovereign debt crises are solved.
When the gold price rises, existing wealth in the form of deferred purchasing power moves from a national currency to gold. Gold owners are the winners from the wealth re-shuffling, while holders of national currency are the losers.
James Turk is founder and chairman of GoldMoney, which provides a convenient and economical way to buy and sell gold, silver and platinum online using digital gold currency for which he has four US patents