Gold Investing: A beginners Guide to the Gold Market

[Lumi]

Gold Investing: A beginners Guide to the Gold Market


by: Adam Doolittle
The first part of investing in gold will be understanding the price of gold and what effects the price of gold. The price of gold is set by a benchmark known as the London Gold Fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day.

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding play a much bigger role in affecting the price, because almost all the gold ever mined still exists and is potentially able to flood the market at the right price.

Given the huge quantity of above-ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. Investors mainly buy gold as a method of diversification, while others might buy gold for emotional reasons like fearing a depression or supporting a political ideal.

How to Invest in Gold

There are several avenues for investing in gold: gold coins, mining stock, Gold ETFs, certificates, gold accounts, and options or futures.

To start out with Gold Coins are, as many experts believe, the best way to start investing in this precious metal. First, because of the simplicity of the gold coins. Starting out you need not worry about the complexity of many other types of gold investing like ETF expense ratios, undue leverage, option timing or futures speculation. Instead, by starting out with gold coins, you?ll skip all the complex forms of gold investing and move straight into holding an ounce of gold in your hand.

Gold Mining Stocks are the next step up from investing in gold coins. Investing in mining shares takes a little more sophistication but as long as you stick with mining companies with strong balance sheets and positive cash flow you?ll be a head of most other investors speculating on unproven mining companies. There are investing opportunities with junior mining companies, but those shares take an even more sophisticated investor.

Gold ETFs are in line with gold mining stocks we just talked about. Gold ETFs are attractive because of the ease and liquidity of trading the fund. However, beware of any paper touting the amount of gold backing that paper. Remember that?s exactly what the U.S. Dollar was, and now it?s lost 95% of it?s value over the past few years. But if you must buy into a gold exchange traded fund, be sure to look for a fund with a low expense ratio. That way fees won?t eat into your wealth.

Gold Certificates haven?t been around in a while, but basically it?s a piece of paper that guarantees the holder a certain amount of gold. The gold certificate was used extensively in the U.S. between 1882 and 1933. In 1933, it became illegal to own gold, thus all gold certificates were withdrawn from circulation. In 1964, it became outright illegal to own the certificate. I can?t help but wonder if in 1964 the government wanted less people to remember dollars used to be backed by something.
<SCRIPT type=text/javascript>AKPC_IDS += "1383,";</SCRIPT>Tags: beginners guide to gold investing, gold coins, gold-investing

 

[DOGS THAT BARK]

illuminati just thought I'd throw this into equation as food for thought--

Still Clueless About Gold and Paper Money

How can you write an entire article that bashes gold (e.g., how it has no intrinsic value, pays no dividend, etc. ) and not once mention the negative attributes of paper money ? what replaced gold for good (supposedly) about 40 years ago?
Really! Think about it for a second. You can?t.
Why? Because once you start talking about how you don?t really need a gold standard or anything backing a currency so long as governments and central banks act prudently, you realize that governments and central banks are completely incapable of doing so over long stretches of time and the end result will always be the destruction of the currency.
But that?s what Brett Arends does in this report from The Wall Street Journal on investing in gold and, in the process, he quotes famed investor Warren Buffett who also seems to be deficient in this area:

Warren Buffett put it well. ?Gold gets dug out of the ground in Africa, or someplace,? he said. ?Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.?
?
It?s a currency ?substitute,? but it?s useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking ?facility? still trying to settle their debts with cigarettes. That?s gold. It doesn?t make sense.
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Honestly, The Wall Street Journal has been one of the more enlightened mainstream media outlets when it comes to gold, but this really sets them back a few notches in my view.
This is like something that you?d read in Money Magazine.
With the help of Wikipedia, let?s review what?s sorely missing from this story by recalling the most important attributes of ?money?, whether it's pure fiat money or dumb ?ol gold coins.

Medium of exchange
When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system, such as the ?double coincidence of wants? problem.
Unit of account
A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a ?measure? or ?standard? of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.
* Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.
* Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.
* A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of value
To act as a store of value, a money must be able to be reliably saved, stored, and retrieved ? and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. In that sense, inflation by reducing the value of money, diminishes the ability of the money to function as a store of value.
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While paper money does exceedingly well as both a medium of exchange and a unit of account, when governments and central banks are given free rein with a nation?s currency, it functions horribly as a store of value, a point that, somehow, is glossed over in every single negative story about gold.
Arend?s report uses the word ?value? twice, first noting that ?gold is hard to value?. Duh!
Then, the author does what every other gold-basher does and cites what happened in 1980 ? when Fed chairman Paul Volcker crushed the gold price (along with inflation) by raising interest rates to almost 20 percent.

As for being a ?store of value,? anyone who bought gold in the late 1970s and held on lost nearly all their purchasing power over the next 20 years.
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Yes, the next twenty years were not kind to gold investors but they are not representative of the other 6,000 years since Man discovered the yellow metal, a period that is also notable for the dearth of responsible central bankers and elected officials.
As for Buffett?s comments, I suspect Martians ? or any life form more advanced than ours ? would be far more surprised that there is nothing backing any currency on this planet than they would be that a scarce commodity was used as money. They?d scratch their heads and say, ?How do you prevent the government from printing too much of the stuff??