Investing in Gold
Mary owns Bullion Gold, but Steve owns Certified Gold
As the charts show on the previous page, both Mary and Steve had positive returns on their portfolios.
So why did Steve do so much better when Mary had 55 ounces of gold and Steve had only 17 ounces of gold?
Why is all Gold not created equal?
To answer this question we must first understand why Gold itself is valuable. Gold by nature’s design is indestructible. That's right, you cannot destroy Gold! If you apply heat to Gold, it turns to liquid and is still Gold. Once cooled, it becomes the familiar solid form we all recognize. If you take a hammer and beat it you still have Gold. If you drop Gold into the ocean and let the salt water attack it for centuries, when you pull it up it is still Gold! This was one of the main reasons why Gold became money, because of its ability to maintain its integrity without breaking down.
Before Gold was used as money people bartered with other commodities such as corn, wheat, livestock, etc. The problem with this system is two-fold. First, the "Equal Value," problem, what is more valuable a bushel of corn or a cow. Since each commodity had a different value, it was hard to set a standard value. For instance, the value of a cow, is it worth one bushel of corn, two, or three? Well, it depended upon which commodity you owned. If you owned the cow, of course the milk and the meat, was the most valuable. But if you owned the corn, you would say, that without my corn to feed your cow it will starve. So, my corn is more valuable and the battle continued.
The second problem with this system was the "Store of Value” problem. If you were a corn farmer and had a record crop producing more corn than you could use, you would store your corn and save it. However, over time if you did not use the corn it would go bad and its value would diminish to zero. So, the commodities used in barter all had a shelf life and only had value for a limited amount of time.
Additionally, all commodities have different values to different users so there was no standard for all people. If you were poor, corn would be very important and have a high value, however if you were rich, corn may not be as valuable to you after a certain amount. This is why a system was needed so that all people would have a standard measure of values.
Gold had all the answers! It is a commodity, and limited in supply. It is indestructible, so it will last forever. If you were rich or poor you wanted it. Mankind had created "The Gold Standard", a standard of value for all. Gold is Money and recognized all over the world as valuable.
So when is an ounce of Gold worth more than an ounce of Gold?
Investing in Gold Bullion
In Mary's portfolio she purchased raw bullion coins. Since Mary purchased the basic commodity, the value of her Gold is based upon the daily spot price. When Mary made her initial purchase in January of 2001, the physical demand for Gold was down so she was able to acquire 55 ounces for $271.00 per ounce. After this purchase, the worldwide demand for gold increased. By January of 2007, bullion was priced @ $623.00 per ounce.
More buyers than sellers, the price increases. More sellers than buyers, the price decreases.
How Much Gold Is Available In The World?
Since Gold is indestructible, all the Gold that has ever been mined by man is still here. For 6,000 years, man has sought Gold. After all that time, the supply of Gold is still limited. Today, the total world supply of gold is 161,000 Metric Tons. One metric ton of Gold equals 35,274 ounces of Gold. That means there is 5,679,114,000 ounces of Gold! That's almost five billion ounces. While still rare compared to other metals, gold mines continue to add to the supply every day.
Mary owned 55 ounces out of 4.9 billion ounces, or 0.00000001% of the world supply. Mary's success was based on the whole world deciding to buy Gold instead of selling Gold.
Mary's purchase was so small compared to the world supply Mary's investment had no impact on the price. If Mary decided to sell her Gold, she could not bring down the price of Gold with her sale. However, if someone who owned a significant amount of Gold decided to sell, this would immediately decrease Mary's bullion value.
Who Owns The Most Gold?
The largest quantities of Gold are held by various countries/governments around the world. You should be proud to know, the government who owns the most Gold is… The UNITED STATES OF AMERICA! It is not a coincidence that the U.S.A. is also known as the richest country in the world!
This perception is based on the fact that the U.S. Government owns 5.7% of the world supply or 8,000 metric tons or 282,192,000 ounces of Gold! So when governments, thru the central bank system, decide to sell some of their Gold, the price changes drastically. This activity exposes Mary's portfolio to risk or loss of value. Mary has no control over when the governments around the world decide to sell.
Mary's financial future all depends upon her buying when Gold is low and selling before it drops. Mary has to be on top of the news on a daily basis and continue to monitor her holdings constantly.
So what about Steve?
Investing in Rare Gold Coins
Since Steve also owns Gold, does he have the same risk as Mary? In short, NO! Here is why. When Steve purchased his Gold, the price per ounce was $271.00. Steve paid $850.00 for an ounce of Gold. Mary had this same option. However Mary felt it was "CRAZY" to spend 3 times the current value for a single ounce of Gold. Due to the price difference, Mary ended up with 55 ounces and Steve only had 17 ounces. So why would Steve do such a thing. In addition to the basic knowledge of Gold that everyone knows, Steve also knows that "All Gold is Not Created Equal." When Steve was a child, his parents took him to a museum. While he was there, he saw many rare and priceless items. This inspired Steve to ask many questions. Most of his questions were answered the same way. Steve asked about a painting he saw and why it was so valuable. The employee of the museum said that this painting is very old, the artist that made it was no longer alive, he painted only one of this scene, and the person who acquired the painting protected it, and kept it safe from damage. As Steve asked about other items, the employee answered the same way. It is Old, It is Rare, and It is in a Perfect Condition. Then the museum employee would say, “that is why it is priceless”.
Steve continued to look around and he noticed that a long line was forming to see a "Special Exhibit of Rare Gold". Even though Steve was young, he knew Gold was valuable and if a painting and other items can be priceless, based on rarity, could Gold be the same? It turned out that this special exhibit was the "KING TUT GOLD" exhibit. As the tour guide told the story of King Tut and Steve saw all the Gold, he knew why it was so valuable. First, King Tut was no longer alive and there was a limited amount of Gold Items in his tomb. Since the tomb was untouched for all those years, the quality of the Gold was still perfect as no one had damaged the Gold. Steve knew from that moment on, anything of "Historical" value and in top "Condition" and low "Supply" would one day become Priceless.
STEVE'S KNOWLEDGE INCREASED HIS WEALTH
Steve applied this knowledge to all of his investments.
Steve knew that as long has an item has a "FIXED" supply and the "DEMAND" was steady, he would benefit. So when it came time to diversify into Gold, Steve looked for 3 Qualities; HISTORY, SUPPLY, and CONDITION. Steve knew that the world supply of Gold was large and that Gold mines around the world were still digging up more Gold and this would increase the supply which would dilute the value of bullion Gold. Steve asked his Gold dealer if there was Gold available that would never increase in supply.
The dealer began to explain, that at one time, the United States Of America was on the Gold standard and our money was made of actual Gold. Since the money was actual Gold, this limited the government to how much money they could produce. Steve replied, "So there is a "Limited Supply." The dealer said yes, and a bell went off in Steve's mind. He remembered the museum employee talking about what made the items in the museum so valuable, "HISTORY, SUPPLY, and CONDITION." Steve knew he was on the right track!
Steve then asked the dealer how he would know if the Gold coin he had was the actual Gold from the government and not a reproduction or copy. The dealer began to explain that rare Gold coins should be "Certified" by a third party to "AUTHENTICATE" and "GRADE" the coin. Steve asked, what does "GRADE" mean. The dealer explained that it was about the "CONDITION" or state of preservation of the coin.
The dealer reminded Steve that because these coins were real money, older coins tend to be worn from being handled. So even if a coin had "HISTORIC" value but was damaged by handling, the value would be reduced. The dealer then explained to Steve that it is not enough to have a coin of "HISTORIC" value if it is damaged or in poor "CONDITION". TRUE RARITY comes when all three elements are combined. When a "Certified Rare Coin" is "HISTORICAL, RARE & IN PERFECT CONDITION", the price of Gold Rising or Falling will have no impact on its value. This is when an ounce of Gold is worth more than an ounce of Gold.
Sign up today for a year subscription to The Gold Monitor to learn:
Top 10 mistakes people make when buying gold
- Looking for a cheap price!
- Dealing with multiple dealers.
- Short term expectations.
- Basing gold markets on stock markets.
- Lack of education.
- Not understanding premiums over Gold Spot.
- Knowing how much to invest.
- Not understanding Gold's value.
- Owning gold stock or ETF's instead of the Physical metal.
- Buying bullion instead of Rare Certified Gold.
10 things gold dealers DON"T want you to know.
- How dealers make money buying gold from you.
- The Value of History
- The value of Supply
- The value of Condition
- The Value of a reputable Grading Company
- Dealer mark up's
- How to make money selling your coins.
- Which coins go up in value the fastest?
- The difference between common date, semi-rare date and rare date coins.
- Why age of a coin does not determine its rarity
Making any of these mistakes can easily cost you 10's of thousands of dollars. Educating yourself before you buy gold will allow you to move with confidence and avoid the nightmare stories you have heard about owning gold. You can sign up and receive a 1 year subscription to "The Gold Monitor" absolutely free!