old investment in india

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old Investment in India :

Until 1990, the Gold Control Act forbade the private holding of gold bars in India. There was physical investment in smuggled ten tola bars, but it was limited and often amounted to keeping a few bars ready to be

made into jewellery for a family wedding. Gold investment essentiallywas in 22 carat jewellery.

Reserve Bank of India

Since 1990, investment in small bars, both imported ten tolas andlocally-made small bars, which have proliferated from local refineries,has increased substantially. GFMS estimate that investment has exceeded 100 tonnes (3.2million oz) in some years, although it is hard to segregate true investment from stocks held by the 16,000 or more gold dealers spread across India. Certainly gold has been used toconceal wealth, especially during the mid-1990s, when the local rupee price increased

steadily.

It was also augmented in 1998 when over 40 tonnes (1.3 million oz) of gold from bondsoriginally issued by the Reserve Bank of India were restituted to the public.

In the cities, however, gold is having to compete with the stock market, investment ininternet industries, and a wide range of consumer goods. In the rural areas 22 carat jewelleryremains the basic investment.

The Gold Deposit Scheme

The government announced a new initiative in its 1999/2000 budget to tap the hoard of private gold in India by permitting commercial banks to take gold deposits of bars, coins or ewellery against payment of interest. Interest levels can be set by each bank, and deposits

must be for three to seven years. Interest and any capital gains on the gold will be exemptfrom tax. The banks can lend the gold to local fabricators or sell it in the Indian market or tolocal banks. However, the depositor has to declare the origin of the gold, so that metal bought illegally to hide wealth cannot be deposited. The State Bank of India was the first toaccept deposits. To date, the amount of gold collected under this scheme (less than 10 tonnesor 0.32 million oz) has fallen well short of the 100 tonnes (3.2 million oz) that wasmentioned when it was launched.

See also: India Markets Introduction; Evolution of Modern Gold Market in India

Indians have a huge fascination for gold. This is evident in the fact that India is the largestconsumer as well as importer of gold in the world. Gold plays a very important role in the social,religious and cultural life of Indians. India Gold Market looks poised to achieve greater heightsgiven the fascination for gold in the country. India consumes about 800 MT of gold whichaccounts to about 20% consumption of gold globally. More than 50% of this is used for makinggold jewelry.



Size of India Gold Market

The domestic India gold market is estimated to be more than US$15 billion and is expected to

rise significantly in the coming years. During April 2008 to February 2009, gems and jewelryworth US$ 17.79 billion was exported from the country. United Arab Emirates imported morethan 30% of gems and jewelry from India, making it the largest importer from the country. HongKong was the second largest importer with 25% followed by United States with 20%. The gemand jewelry industry accounts for more than 10% of India's total commodities exports.

Gold certification in India

The government has taken steps to protect the public from buying adulterated gold; Hallmarkingof gold jewelry is one such step. Hallmarking of gold jewelry indicates the accurate finding outand official recording of the proportionate content of precious metals present in gold. Themarking is done either by laser marking machine or by punches. Hallmark is the official mark used in several countries across the world as an assurance of purity or fineness of gold jewelry.The Bureau of Indian Standard or BIS was named by the Government as the lone agency in thecountry for providing hallmarking of gold jewelry under the provisions of the BIS Act, 1986.

Indian Standard on Gold and Gold alloys

y IS 1417 Grades of gold and gold alloys, Jewelry/Artefacts-Fineness and Markingy IS 1418 Assaying of Gold in Gold Bullion, Gold alloys and Gold Jewelry/ Artefacts -

Cupellation (Fire Assay Method)y IS 2790 Guidelines for manufacture of 23, 22,21,18,14 and 9 carat gold alloysy IS 3095 Gold Solders for use in manufacture of Jewelry

Features of India Gold Market

Though India is the leading consumer of gold in the world, the gold market in India is largelyfragmented and unorganized. Due to the non availability of a benchmark price, the gold prices inIndia vary very much from region to region. The festive and the wedding season in the countrywitnesses a heavy demand for gold. Despite the global economic recession, the goldconsumption in the country during these times has not abetted.

Factors affecting India Gold Market



The monsoons and the harvest of the country have a significant affect on the sale and purchase of

gold in the country. Both these factors determine the amount of purchasing power that people

will have, which in turn decides on the amount of gold consumption and other consumptions as

well. Purchasing gold and other precious metals on occasions like Akshaya Tritiya is considered

to be auspicious.

How The Gold Market Works

Exploring the intricacies of how the gold market works would take volumes. This primer coversthe basic operation of the market and the primary indicators of activity ± essential informationfor making informed investments.

Over-the-Counter

The gold market has two distinct segments. Almost all trading of physical gold takes place on theover-the-counter market (OTC), centered primarily in London, New York, and Zurich. OTCtrades are direct unstructured transactions between principals ± mining companies, central banks,and industrial consumers. The standard size of OTC gold trades ranges from 5,000 to 10,000ounces. Investors and speculators can also trade in OTC derivatives similar to those discussed below.

Because physical assets are bought and sold, the current OTC gold market price is an important benchmark. The London fix - the most widely used indicator - is calculated twice daily (the AM

fix and the PM fix).

And Into the Futures

What most people think of as the gold market is actually the gold futures market, the trade thattakes place on exchanges such as the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX), the Chicago Board of Trade (CBOT), and the TokyoCommodity Exchange (TOCOM). Investors in these exchanges speculate on the movement of the price of gold. The principal indicator is the spot price - the quote price for gold to bedelivered and paid for on the settlement date two days into the future. The spot price is heavilyinfluenced by the London fix.

Exit Gold, Enter Paper

Derivatives, instruments that settle further into the future than the spot settlement date, wereintroduced into the gold market to hedge against adverse movement in the spot price. There aretwo basic types of derivatives, although each has numerous complicated variations.



Fut ures are contracts to buy or sell a specified quantity of gold at a set price on a fixed futuredate. Delivery dates and unit quantities are standardized by the exchange. Futures trade is buyingand selling futures contracts; physical gold is rarely delivered.

Options are a variation on futures that give the holder the right ± but not an obligation - to buy

(call option) or sell (put option) a specified quantity of gold at a set price on or before a specifieddate. Options are also standardized by the exchanges.

Out of the Exchange and Into the Stock Market

In 2003 the exchange-traded fund (ETF) introduced a form of gold trade into the stock market.These instruments are backed 100% by gold, although the holder never has possession of the physical asset. Similar instruments backed by futures are also available. Although ETFs mayappear to simplify investing, they introduce another layer of risk while having none of the benefits of owning physical gold.

Untangling the Rats Nest

Trading directly in the gold market is indeed complex. Fortunately, there exists a far superior option ± invest in physical gold through Certified Gold Exchange. Our PriceMatchPlus®guarantee assures you the best prices on both Certified Bullion for short-term investments andCertified Gold Coins for your long-term investment strategy.

Gold as an investment

From Wikipedia, the free encyclopedia

Reserves of SDR, forex and gold in 2006



A Good Delivery bar, the standard for trade in the major international gold markets.

Of all the precious metals, gold is the most popular as an investment.[1] Investors generally buy

gold as a hedge or harbor against economic, political, or social fiat currency crises (includinginvestment market declines, burgeoning national debt, currency failure, inflation, war and socialunrest). The gold market is subject to speculation as are other markets, especially through the useof futures contracts and derivatives. The history of the gold standard, the role of gold reserves incentral banking, gold's low correlation with other commodity prices, and its pricing in relation tofiat currencies during the current global financial crisis, suggest that gold behaves more like acurrency than a commodity.[2][3]

Contents

[hide]

y 1 Gold price

y 2 Factors influencing the gold price

o 2.1 Central banks

o 2.2 Hedge against financial stress

o 2.3 Jewelery and industrial demand

o 2.4 Short selling

o 2.5 War, invasion and national emergency

y 3 Investment vehicles

o 3.1 Bars

o 3.2 Coins

o 3.3 Exchange-traded products (ETPs) o 3.4 Certificates

o 3.5 Accounts

o 3.6 Derivatives, CFDs and spread betting

o 3.7 Mining companies

y 4 Investment strategies

o 4.1 Fundamental analysis

o 4.2 Gold versus stocks

o 4.3 Technical analysis

o 4.4 Using leverage

y 5 Taxation

y 6 Scams and frauds

y 7 See also

y 8 References

y 9 External links

[edit] Gold price



Gold price history in 1960-2011

Gold has been used throughout history as money and has been a relative standard for currency

equivalents specific to economic regions or countries. Many European countries implementedgold standards in the latter part of the 19th century until these were dismantled in the financialcrises involving World War I. After World War II, the Bretton Woods system pegged the UnitedStates dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 NixonShock , when the US unilaterally suspended the direct convertibility of the United States dollar togold and made the transition to a fiat currency system. The last currency to be divorced fromgold was the Swiss Franc in 2000.

Since 1919 the most common benchmark for the price of gold has been the London gold fixing, atwice-daily telephone meeting of representatives from five bullion-trading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the

intra-day spot price, derived from over-the-counter gold-trading markets around the world (code "XAU"). The following table sets forth the gold price versus various assets and key statistics:

Year Gold

USD/ozt[4]

DJIA USD[5] World GDP

USD tn[6]

US Debt

USD bn[7]

Trade

Weighted

US dollar

Index[8]

1970 37 839 3.3 370

1975 140 852 6.4 533 33.0

1980 590 964 11.8 908 35.7

1985 327 1,547 13.0 1,823 68.2

1990 391 2,634 22.2 3,233 73.2



1995 387 5,117 29.8 4,974 90.3

2000 273 10,787 31.9 5,662 118.6

2005 513 10,718 45.1 8,170 111.6

2010 1,410 11,578 ... 14,025 99.9

1970 to 2010 net change, %

3,792 1,280 ... 3,691 ...

1975 (post US off gold standard) to 2010 net change, %

929 1,259 ... 2,531 ...

In March 2008, the gold price exceeded US$1,000,[9] achieving a nominal high of US$1,004.38.In real terms, actual value was still well below the US$599 peak in 1981 (equivalent to $1417 inU.S. 2008 dollar value). After the March 2008 spike, gold prices declined to a low of US$712.30 per ounce in November. Pricing soon resumed on upward momentum by temporarily breakingthe US$1000 barrier again in late February 2009 but regressed moderately later in the quarter.

Later in 2009, the March 2008 intra-day spot price record of US$1,033.90 was broken severaltimes in October, as the price of gold entered parabolic stages of successively new highs when aspike reversal to $1226 initiated a retrace of the price to the mid-October levels.

On June 6, 2011, gold reached a new record high of $1549.00 at the London Gold Fixing and the price reached US$1795.00 on August 10, 2011.[10]

[edit] Factors influencing the gold price

Today, like most commodities, the price of gold is driven by supply and demand as well asspeculation. However unlike most other commodities, saving and disposal plays a larger role inaffecting its price than its consumption. Most of the gold ever mined still exists in accessibleform, such as bullion and mass-produced jewelry, with little value over its fine weight ² and isthus potentially able to come back onto the gold market for the right price.[11][12] At the end of

2006, it was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 long tons;174,000 short tons).[13] This can be represented by a cube with an edge length of 20.2 metres(66 ft).

Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.[14] According to the World Gold Council, annual mine production of gold over thelast few years has been close to 2,500 tonnes.[15] About 2,000 tonnes goes into jewellery or



industrial/dental production, and around 500 tonnes goes to retail investors and exchange tradedgold funds.[15]

[edit] Central banks

Central banks and the International Monetary Fund play an important role in the gold price. Atthe end of 2004 central banks and official organizations held 19 percent of all above-ground goldas official gold reserves.[16] The ten year Washington Agreement on Gold (WAG), which datesfrom September 1999, limits gold sales by its members (Europe, United States, Japan, Australia,Bank for International Settlements and the International Monetary Fund) to less than 500 tonnesa year.[17] European central banks, such as the Bank of England and Swiss National Bank , werekey sellers of gold over this period.[18] In 2009, this agreement was extended for a further fiveyears, but with a smaller annual sales limit of 400 tonnes.[19]

Although central banks do not generally announce gold purchases in advance, some, such asRussia, have expressed interest in growing their gold reserves again as of late 2005.[20] In early

2006, China, which only holds 1.3% of its reserves in gold,[21]

announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India hasrecently purchased over 200 tons of gold which has led to a surge in prices.[22]

It is generally accepted that interest rates are closely related to the price of gold. As interest ratesrise, the general tendency is for the gold price, which earns no interest, to fall, and as rates dip,for gold price to rise. As a result, gold price can be closely correlated to central banks via themonetary policy decisions made by them related to interest rates. For example if market signalsindicate the possibility of prolonged inflation, central banks may decide to enact policies such asa hike in interest rates that could affect the price of gold in order to quell the inflation. An

opposite reaction to this general principle can be seen after the European Central bank raised itsinterest rate on April 7th, 2011 for the first time since 2008.[23] The price of gold responded witha muted response and then drove higher to hit new highs one day later.[24]. A similar situationhappened in India: In August 2011 when the interest rate were at their highest in two years, thegold prices peaked as well.[25]

[edit] Hedge against financial stress

Gold, like all precious metals, may be used as a hedge against inflation, deflation or currencydevaluation. As Joe Foster, portfolio manager of the New York-based Van Eck InternationalGold Fund, explained in September 2010:

The currencies of all the major countries, including ours, are under severe pressure because of massive

government deficits. The more money that is pumped into these economies the printing of money

basically then the less valuable the currencies become.[26]

If the return on bonds, equities and real estate is not adequately compensating for risk andinflation then the demand for gold and other alternative investments such as commodities



increases. An example of this is the period of stagflation that occurred during the 1970s andwhich led to an economic bubble forming in precious metals.[27][28]

[edit] Jewelery and industrial demand

Jewelery consistently accounts for over two-thirds of annual gold demand. India is the largestconsumer in volume terms, accounting for 27% of demand in 2009, followed by China and theUSA.[29]

Industrial, dentistry and medical uses account for around 12% of gold demand. Gold has highthermal and electrical conductivity properties, along with a high resistance to corrosion and bacterial colonization. Jewelery and industrial demand has fluctuated over the past few years dueto the steady expansion in emerging markets of middle classes aspiring to Western lifestyles,offset by the financial crisis of 2007±2010.[30]

[edit] Short selling

The price of gold is also affected by various well-documented mechanisms of artificial pricesuppression, arising from fractional-reserve banking and naked short selling in gold, and particularly involving the London Bullion Market Association, the United States Federal ReserveSystem, and the banks HSBC and JPMorgan Chase.[31][32][33][34] Gold market observers havenoted for many years that the price of gold tends to fall artificially at the start of New York trading.[35]

[edit] War, invasion and national emergency

When dollars were fully convertible into gold via the gold standard, both were regarded as

money. However, most people preferred to carry around paper banknotes rather than thesomewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might result. This happened in the USA during the Great Depression of the 1930s, leadingPresident Roosevelt to impose a national emergency and issue Executive Order 6102 outlawingthe ownership of gold by US citizens.[36] There was only one prosecution under the order, and inthat case the order was ruled invalid by federal judge John M. Woolsey, on the technical groundsthat the order was signed by the President, not the Secretary of the Treasury as required.[37]

In times of war, people fear that their assets may be seized and that the currency may becomeworthless. They see gold as a solid asset which will always buy food or transportation. Thus intimes of great uncertainty, particularly when war is feared, the demand for gold rises.[38][39]

[edit] Investment vehicles

[edit] Bars



1 troy ounce (31 g) gold bar with certificate

The most traditional way of investing in gold is by buying bullion gold bars. In some countries,like Canada, Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold at the major banks. Alternatively, there are bullion dealers that provide the same service.Bars are available in various sizes. For example in Europe, Good Delivery bars areapproximately 400 troy ounces (12 kg).[40] 1 kilogram (32 ozt) are also popular, although manyother weights exist, such as the 10oz, 1oz, 10 g, 100 g, 1 kg, 1 Tael, and 1 Tola.

Bars generally carry lower price premiums than gold bullion coins. However larger bars carry anincreased risk of forgery due to their less stringent parameters for appearance. While bullioncoins can be easily weighed and measured against known values, most bars cannot, and gold buyers often have bars re-assayed. Larger bars also have a greater volume in which to create a partial forgery using a tungsten-filled cavity, which may not be revealed by an assay.[41]

One way of avoiding such a scam is to buy and hold gold bars that are held within the LBMA

³chain of custody´ and store the gold in a LBMA recognized vault. The gold bullion held withinthe LBMA recognized vaults can be bought and sold easily. If it is removed from the vaults andstored outside of the chain of integrity, for example stored at home or in a private vault, the bar will have to be re-assayed before it can be returned to the LBMA chain. This process is describedunder the LBMA's "Good Delivery Rules".[42]

The LBMA includes in this "traceable chain of custody" refiners as well as vaults. Both have tomeet their strict guidelines. Bullion products from these trusted refiners are traded at face value by LBMA members without assay testing. By buying bullion from an LBMA member dealer andstoring it in an LBMA recognized vault, customers avoid the need of re-assaying or theinconvenience in time and expense it would cost.[43]

Efforts to combat gold bar counterfeiting include kinebars which employ a unique holographictechnology and are manufactured by the Argor-Heraeus refinery in Switzerland.

[edit] Coins



The faces of a Krugerrand, the most common gold bullion coin.

Gold coins are a common way of owning gold. Bullion coins are priced according to their fineweight, plus a small premium based on supply and demand (as opposed to numismatic gold coinswhich are priced mainly by supply and demand based on rarity and condition).

The Krugerrand is the most widely-held gold bullion coin, with 46,000,000 troy ounces (1,400tonnes) in circulation. Other common gold bullion coins include the Australian Gold Nugget

(Kangaroo), Austrian Philharmoniker (Philharmonic), Austrian 100 Corona, Canadian GoldMaple Leaf , Chinese Gold Panda, Malaysian Kijang Emas, French Napoleon or Louis d'Or,Mexican Gold 50 Peso, British Sovereign, American Gold Eagle, and American Buffalo.

Coins may be purchased from a variety of dealers both large and small. Fake gold coins are notuncommon, and are usually made of gold-plated lead.

[edit] Exchange-traded products (ETPs)

Gold exchange-traded products may include ETFs, ETNs, and CEFs which are traded like shareson the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker symbol"GOLD"), was launched in March 2003 on the Australian Stock Exchange, and originallyrepresented exactly 0.1 troy ounces (3.1 g) of gold. As of November 2010, SPDR Gold Shares isthe second-largest exchange-traded fund (ETF) in the world by market capitalization.[44]

Gold ETPs represent an easy way to gain exposure to the gold price, without the inconvenienceof storing physical bars. However exchange-traded gold instruments, even those which hold physical gold for the benefit of the investor, carry risks beyond those inherent in the preciousmetal itself. For example the most popular gold ETP (GLD) has been widely criticized, and evencompared with mortgage-backed securities, due to features of its complexstructure.[31][45][46][47][48]

Typically a small commission is charged for trading in gold ETPs and a small annual storage feeis charged. The annual expenses of the fund such as storage, insurance, and management fees arecharged by selling a small amount of gold represented by each certificate, so the amount of goldin each certificate will gradually decline over time.

Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional open-endcompanies and UITs.[49] The main differences are that ETFs do not sell directly to investors and



they issue their shares in what are called "Creation Units" (large blocks such as blocks of 50,000shares). Also, the Creation Units may not be purchased with cash but a basket of securities thatmirrors the ETF's portfolio. Usually, the Creation Units are split up and re-sold on a secondarymarket.

ETF shares can be sold in basically two ways. The investors can sell the individual shares toother investors, or they can sell the Creation Units back to the ETF. In addition, ETFs generallyredeem Creation Units by giving investors the securities that comprise the portfolio instead of cash. Because of the limited redeemability of ETF shares, ETFs are not considered to be and maynot call themselves mutual funds.[49]

[edit] Certificates

Gold certificates allow gold investors to avoid the risks and costs associated with the transfer andstorage of physical bullion (such as theft, large bid-offer spread, and metallurgical assay costs) by taking on a different set of risks and costs associated with the certificate itself (such as

commissions, storage fees, and various types of credit risk ).

Banks may issue gold certificates for gold which is allocated (non-fungible) or unallocated (fungible or pooled). Unallocated gold certificates are a form of fractional reserve banking anddo not guarantee an equal exchange for metal in the event of a run on the issuing bank's gold ondeposit.[50] Allocated gold certificates should be correlated with specific numbered bars, althoughit is difficult to determine whether a bank is improperly allocating a single bar to more than one party.[51]

The first paper bank notes were gold certificates. They were first issued in the 17th century whenthey were used by goldsmiths in England and the Netherlands for customers who kept deposits

of gold bullion in their vault for safe-keeping. Two centuries later, the gold certificates began being issued in the United States when the US Treasury issued such certificates that could beexchanged for gold. The United States Government first authorized the use of the goldcertificates in 1863. In the early 1930s the US Government restricted the private gold ownershipin the United States and therefore, the gold certificates stopped circulating as money. Nowadays,gold certificates are still issued by gold pool programs in Australia and the United States, as wellas by banks in Germany and Switzerland.

[edit] Accounts

Many types of gold "accounts" are available. Different accounts impose varying types of

intermediation between the client and their gold. One of the most important differences betweenaccounts is whether the gold is held on an allocated (non-fungible) or unallocated (fungible) basis. Another major difference is the strength of the account holder's claim on the gold, in theevent that the account administrator faces gold-denominated liabilities (due to a short or nakedshort position in gold for example), asset forfeiture, or bankruptcy.

Many banks offer gold accounts where gold can be instantly bought or sold just like any foreigncurrency on a fractional reserve (non-allocated, fungible) basis. Swiss banks offer similar service



on an allocated (non-fungible) basis. Pool accounts, such as those offered by Kitco, facilitatehighly liquid but unallocated claims on gold owned by the company. Digital gold currency systems operate like pool accounts and additionally allow the direct transfer of fungible gold between members of the service. BullionVault, for example, allows clients to create a bailment on allocated (non-fungible) gold, which becomes the legal property of the buyer.

[edit] Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures and options, currently trade on various exchangesaround the world and over-the-counter (OTC) directly in the private market. In the U.S., goldfutures are primarily traded on the New York Commodities Exchange (COMEX) andEuronext.liffe. In India, gold futures are traded on the National Commodity and DerivativesExchange (NCDEX) and Multi Commodity Exchange (MCX).[52]

The product symbol for gold futures is GC, and it is traded in a standard contract size of 100 troyounces. CME Globex, CME ClearPort (CME Group) and Open Outcry (New York) are the

primary futures exchange venues through which it is traded. The minimum fluctuation allowed in price is $0.10 per troy ounce, and it is held to a minimum of 995 fineness qualityspecification.[53]

As of 2009, holders of COMEX gold futures have experienced problems taking delivery of their metal. Along with chronic delivery delays, some investors have received delivery of bars notmatching their contract in serial number and weight. The delays cannot be easily explained byslow warehouse movements, as the daily reports of these movements show little activity.Because of these problems, there are concerns that COMEX may not have the gold inventory to back its existing warehouse receipts.[54]

Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK, providecontract for difference (CFD) or spread bets on the price of gold.

[edit] Mining companies

These do not represent gold at all, but rather are shares in gold mining companies. If the gold price rises, the profits of the gold mining company could be expected to rise and as a result theshare price may rise. However, there are many factors to take into account and it is not alwaysthe case that a share price will rise when the gold price increases. Mines are commercialenterprises and subject to problems such as flooding, subsidence and structural failure, as well asmismanagement, theft and corruption. Such factors can lower the share prices of mining

companies.

The price of gold bullion is volatile, but unhedged gold shares and funds are regarded as evenhigher risk and even more volatile. This additional volatility is due to the inherent leverage in themining sector. For example, if you own a share in a gold mine where the costs of production are$300 per ounce and the price of gold is $600, the mine's profit margin will be $300. A 10%increase in the gold price to $660 per ounce will push that margin up to $360, which represents a20% increase in the mine's profitability, and potentially a 20% increase in the share price.



Furthermore, at higher prices, more ounces of gold become economically viable to mines,enabling companies to add to their reserves. Conversely, share movements also amplify falls inthe gold price. For example, a 10% fall in the gold price to $540 will decrease that margin to$240, which represents a 20% fall in the mine's profitability, and potentially a 20% decrease inthe share price.

To reduce this volatility, some gold mining companies hedge the gold price up to 18 months inadvance. This provides the mining company and investors with less exposure to short term gold price fluctuations, but reduces returns when the gold price is rising.

[edit] Investment strategies

[edit] Fundamental analysis

Investors using fundamental analysis analyze the macroeconomic situation, which includesinternational economic indicators, such as GDP growth rates, inflation, interest rates,

productivity and energy prices. They would also analyze the yearly global gold supply versusdemand. Over 2005 the World Gold Council estimated yearly global gold supply to be 3,859tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.[55] While gold productionis unlikely to change in the near future, supply and demand due to private ownership is highlyliquid and subject to rapid changes. This makes gold very different from almost every other commodity.[11][12] Identifiable investment demand for gold, which includes gold exchange-tradedfunds, bars and coins, was up 64 percent in 2008 over the year before.[56]

[edit] Gold versus stocks

Dow/Gold Ratio 1968-2008

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, an indicator of how bad a recession is andwhether the outlook is deteriorating or improving, to a value well below 4. The ratio fell on



February 18, 2009 to below 8.[56] During these difficult times, many investors tried to preservetheir assets by investing in precious metals, most notably gold and silver .

The performance of gold bullion is often compared to stocks due to their fundamentaldifferences. Gold is regarded by some as a store of value (without growth) whereas stocks are

regarded as a return on value (i.e., growth from anticipated real price increase plus dividends).Stocks and bonds perform best in a stable political climate with strong property rights and littleturmoil. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison togold in part because of the stability of the American political system.[57] This appreciation has been cyclical with long periods of stock outperformance followed by long periods of goldoutperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the endof the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union's invasion of Afghanistan and the threatof the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3and has fallen sharply since.

On November 30, 2005, Rick Munarriz of The Motley Fool posed the question of whichrepresented a better investment: a share of Google or an ounce of gold. The specific comparison between these two very different investments seems to have captured the imagination of many inthe investment community and is serving to crystallize the broader debate.[58][59] At the time of writing, a share of Google's stock was $405 and an ounce of gold was one day from breaking the$500 barrier, which it did December 1. On January 4, 2008 23:58 New York Times, it wasreported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closingat $859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges. OnJanuary 24, 2008, the gold price broke the $900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time ever on March 13, 2008 amid recession fears inthe United States.[60] Google closed 2008 at $307.65 while gold closed the year at $866. Leadinginto 2010, Google had doubled off that (100%), whereas gold had risen 40%.

The analysis of log-linear oscillations in the gold price dynamics for 2003±2010 conductedrecently by Askar Akayev's research group has allowed them to forecast a collapse in gold pricesin May ± July 2011.[61] As of 18 July 2011, this collapse had not yet occurred, with gold at record prices of over $1600 per ounce.

[62]

In his book Basic Economics, Thomas Sowell[63] argued that, in the long-term, gold does nothold its value compared to stocks and bonds:

To take an extreme example, while a dollar invested in bonds in 1801 would be worth nearly a

thousand dollars by 1998, a dollar invested in stocks that same year would be worth more than

half a million dollars. All this is in real terms, taking inflation into account. Meanwhile, a dollar

invested in gold in 1801 would by 1998 be worth just 78 cents.

[edit] Technical analysis



As with stocks, gold investors may base their investment decision partly on, or solely on,technical analysis. Typically, this involves analyzing chart patterns, moving averages, markettrends and/or the economic cycle in order to speculate on the future price.

[edit] Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing assets and then purchasing gold on account with the loaned funds. Leverage is also anintegral part of buying gold derivatives and unhedged gold mining company shares (see goldmining companies). Leverage or derivatives may increase investment gains but also increases thecorresponding risk of capital loss if/when the trend reverses.

[edit] Taxation

Main article: Taxation of precious metals

Gold maintains a special position in the market with many tax regimes. For example, in theEuropean Union the trading of recognised gold coins and bullion products are free of VAT.Silver , and other precious metals or commodities, do not have the same allowance. Other taxessuch as capital gains tax may also apply for individuals depending on their tax residency. U.S.citizens may be taxed on their gold profits at 15, 23, 28 or 35 percent, depending on theinvestment vehicle used.[64]

USA: Due to section 9006 of the U.S. Patient Protection and Affordable Care Act, starting onJanuary 1, 2012, IRS tax form 1099 was going to be required for all purchases of goods andservices that exceeded $600 per calendar year. Congress repealed the section of PPACA relatingto 1099 reporting in April 2011.[65]

[edit] Scams and frauds

Gold attracts its fair share of fraudulent activity. Some of the most common to be aware of are:

y High-yield investment programs - HYIPs are usually just pyramid schemes dressed up with no

real value underneath. Using gold in their prospectus makes them seem more solid and

trustworthy.

y Advance fee fraud - Various emails circulate on the Internet for buyers or sellers of up to10,000

metric tonnes of gold. This is more gold than the US Federal Reserve owns. Often naive

middlemen are drafted in as hopeful brokers, and usually mention mythical terms like 'SwissProcedure' or 'FCO' (Full Corporate Offer). The end-game of these scams is unknown, but they

probably just attempt to extract a small 'validation' sum out of the innocent buyer/seller from

their hope of getting the big deal.[66]

y Gold dust sellers - This scam persuades an investor there is real gold with a trial quantity, then

eventually delivers brass filings or similar.

y Counterfeit gold coins.



y Shares in fraudulent mining companies with no gold reserves, or potential of finding gold.[citation

needed ]

y Cash for gold - With the rise in the value of gold due to the financial crisis of 2007-2010, there

has been a surge in companies that will buy personal gold in exchange for cash, or sell

investments in gold bullion and coins. Several of these have prolific marketing plans and high

value spokesmen, such as prior vice presidents. Many of these companies are under

investigation for a variety of securities fraud claims, as well as laundering money for terrorist

organizations.[67][68][69][70]

Also given that ownership is often not verified, many companies are

considered to be receiving stolen property, and multiple laws are under consideration on

methods to curtail this.[71][72]

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