Gold has been considered sacred for millennia, with historical records showing that it was used for both ornamental and trade purposes as far back as the Mesopotamian era. The Ancient Egyptians mastered the art of refining gold, but used it more for adornment purposes rather than a form of money.
In the middle ages, gold was used as a form of value storage, while silver became the common mode of coin payment. It was the Crusades and the trade boom in ancient Europe and beyond that brought back gold as a mode of payment.
Gold’s increase in value and fluctuating rates
The yellow metal witnessed a sharp rise in value in the 14th and 15th centuries due to the dip in European mining, which resulted in a low supply of gold that could not meet existing demands. This subsequently made gold coin production rarer and triggered a consistent deflation over time.
Gold production increased with the discovery of the Americas, and this helped curb deflation in Europe to the point where an inflation in gold prices became the norm in Europe and later on, even in Asia. However, the value of gold coins dipped sharply in the late 16th century, when the practice of mixing other metals with gold became commonplace
Sir Isaac Newton’s role in determining gold prices
As Warden of the Royal Mint, Sir Isaac Newton played a key role in determining silver and gold prices. This helped establish the Gold Standard in UK in the early 19th century, and then in other countries over time. Fixed conversion rates became standard thereafter.
The emergence and might of the British Empire made the British Pound the official reserve currency at the time, but the American Civil War and the gradual rise of the USA as a strong economic force played a significant role in upping gold rates yet again. This was until 1934, when the American dollar was devalued, and gold prices spiked by over 65 percent.
The 1970s up until today
President Richard Nixon axed American dollar’s convertibility to gold in 1971, which put an end to the pivotal role gold played in global currency systems. World crises over the decades such as the Oil Price Shock of the mid-70s, Iran’s Islamic Revolution, the Soviet invasion of Afghanistan, and the 1986 sanctions on South Africa prompted the continuous upsurge in gold rates.
This equated to an ounce of gold being worth $2,300 per ounce in inflation-adjusted U.S. dollars, as of 2008.
Gold is considered to be one of the safest investments in times of economic turbulence. Despite being a commodity that has its share of volatile price fluctuations in the short-term, its remarkable long-term returns make it a favorite among investors.
What is the best way to invest in gold? While there is no concrete answer to this question, there are a bevy of options investors can choose from.
Gold bullion and coins
Bullion and minted coins represent pure, tangible value and are the investment of choice for many. Direct ownership of gold coins in particular is desirable because of their easy storage, portability and aesthetic value, due to which many investors are willing to pay a premium for them.
Gold bars can be purchased through bullion dealers, but since doing so isn’t always easy, investors can choose gold certificate schemes that are offered by several organizations. These schemes allow for investments in bullion without worrying about the storage aspect since the bars are stocked in secure vaults. A certificate of deposit is handed over to the investor when he/she purchases the gold.
Exchange Traded Commodities (ETCs)
ETCs are inert investments that track the commodities sector. If you opt for a gold ETC, the worth of your investment in the yellow metal will be proportional to the rise and fall in gold prices. ETCs also give investors two options: to leverage their savings, or bet against a rise in gold prices.
Shares and mutual funds
Gold shares and mutual funds are a feasible option for those wary of investing in physical gold. These consist of the stock portfolios of gold mining companies. It is always advisable to invest in mutual funds or shares of well-established mining companies rather than go for cheap stocks of relatively younger firms.
The above mentioned gold investment instruments are just a few in the pick of many. Gold Accumulation Plans (GAPs), gold orientated funds, and other choices may be more to your liking. You must ideally consult your financial advisor before making any investment.
Everyone wants to buy gold at cheap rates regardless of current prices. Some bonds and stocks, and even mints, online sellers, and antique dealers come up as options. However, the collector’s gold offered by such sources is not always pure. So how can a serious investor buy gold at good prices?
1 – Factors that affect gold rates
Before deciding to buy gold at ‘bargain’ prices, one must be aware of the dynamics that influence rates. These include:
- Gold quantity and quality
- The form of gold on offer
- The source of the gold
- The dealer
2 – Buying physical gold
It is recommended that investors buy gold bullion or coins of a significantly higher weight/value, since purchasing high-demand coins such as Krugerrands ensures that their prices appreciate faster and yield better returns. Buying gold of a lesser weight/value may be easier on the pocket at first, but will yield lower returns in the long run. This is because storage, insurance, and shipping costs are passed on from the mint to the seller, which eventually reflects in the retail price. To summarize, this makes bullion or coins of a higher weight more desirable since they have fewer price mark-ups and are more inexpensive per gram.
3 – Purchasing gold online
If you would rather buy gold from the convenience of your home, take note: make purchases only from accredited dealers who are part of the World Gold Council (WGC). You can find out more about these dealers on the WGC website to avoid getting cheated or scammed by unscrupulous or fake online vendors.
4 – Going straight to the source
Travelling to a gold mine sounds like a ‘far off’ idea, and it is. However, the fact is that gold prices are cheapest when the metal is just mined, because there is no value chain involved. Entrepreneurs and businesspeople in particular can consider opening dealerships in a gold-producing nation to make the most of low costs due to closer proximity to mines.
5 – Buy gold after its price has fallen
The best time to buy gold is, of course, when its rate depreciates a bit. However, don’t wait for prices to hit absolute rock bottom, as there’s no telling if anyone can get assumptions down to the T.
The precious metals market is a highly dynamic one, with most of its activity being spurred by gold prices. The price of the yellow metal is propelled by demand and supply, but there are several other factors that influence its day-to-day value. These include its viability as a long-term investment, which makes it a global currency in the truest sense of the word.
Gold prices have skyrocketed over the decades in comparison to other national currencies. What drives this momentum, and why?
Gold and global currencies
The gold market is largely influenced by the trade of both physical and ‘contract’ gold, as well as the value of the U.S. dollar. The need to buy gold in any form is inversely proportional to the might of the American dollar: the stronger the U.S. dollar, the lower the price of gold, and vice versa.
However, any change in the buying and selling patterns of gold is owing to currency fluctuation worldwide and is not just limited to the U.S. dollar.
Gold and central reserves
Central reserves the world over hold the highest concentration of gold bullion. As a result, gold prices are also highly dependent on the policies of, and the reserves in such institutions. If a central bank sells off a certain percent of its gold reserve, the price of the metal may fall. On the opposite side of the coin, however, its value may increase if banks fail to provide adequate investment returns to customers.
Global crises of a political or economic nature also have a significant impact on gold prices. National currencies can take a hit during times of uncertainty, and this is when the demand for gold rises since it is then viewed as a ‘safe investment’.
The above mentioned points present a very brief overview on what drives global gold prices. The standard accepted benchmark for determining the value of the metal is the London Gold Market Fixing, which comprises of five firms that buy and sell gold bullion. These firms are:
- Barclays Capital
- Deutsche Bank
- Societe Generale
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