What is Gold?

Gold is a chemical element with the symbol Au (from Latin: aurum) and atomic number 79, making it one of the higher atomic number element that occur naturally. In a pure form, it is a bright slightly redish yellow, dense, soft, malleable, and ductile metal (it is deemed rare and precious with high value).

Review of the Gold Investment Market

Gold investment worldwide has grown dramatically in the last five years, but compared with the total stock of financial assets, gold bullion investment is still just a tiny proportion.
Several factors are now stimulating gold investment by new pension fund money - as well as by private investors

Demand from New Gold Investment Markets

Sales of gold jewelry across Asia are surging as the local economies boom and private investment grows. China's gold investment demand grew by 20% in 2007, while Indian consumers bought a record 900 tonnes - well over one-fifth of the total world market. Gold buyers in Asia tend to think of their jewelry as a form of gold investment. Prevented from owning gold bullion until very recently, they invest in gold to protect their savings from inflation and currency shocks. That's why the most popular form of gold jewelry in Asia - heavy chains and bracelets - is known as "investment jewelry" in the gold industry.

Mining Output Fails to Meet Gold Investment Demand

Gold mining companies worldwide have failed to meet the growing demand from gold jewelry and gold investment buyers, pushing the gold price steadily higher. The former world's No.1 gold mining nation, South Africa, has seen its annual gold output halve since 1998, and new operations in China and Russia - though growing - have failed to pick up the slack. According to consultants "Virtual Metals" total world mining output has fallen by 4% since 2003. Their gold investment analysts don't forecast an early return to growing output.

Gold Investment vs. the Falling Dollar

As the US Dollar has slumped gold investment has outstripped the gains in all major world currencies. In the five years to 2008 buying Euros to defend against the Dollar's decline has returned 47%. Gold investment, on the other hand, has returned 131%. British, Australian, South African and Indian citizens undertaking gold investments in 2007 all enjoyed the gold price reaching record new all-time highs.

When Inflation Looms, Gold Investment Shines

The surge in crude oil prices has closely matched the gains in gold prices since 2003, but many people now thinking about gold investment will also want to consider the surge in world food prices, the boom in base metals such as copper, and the current all-time highs in the cost of shipping. Rising demand for better housing and durable goods from Asian consumers is certainly a factor. But many gold investment analysts also point to the huge growth in credit and debt in the West. The money supply in the United States has doubled in the last seven years. In Europe, growth in the money supply hit a near-30 year record in late 2007, increasing the appeal of gold investment as the value of each Euro in circulation threatens to shrink under the weight of new notes and electronic account balances.

Gold Investment: The Antidote to Complex Debt Defaults

"Financial innovation in the last few years has been extremely strong and powerful," as Gilles Gilcenstein, head of asset management at BNP Paribas, put it in late 2006. We've now seen this bubble in complex and novel investments bite back. The global credit crunch first bit when the alphabet soup of MBS, CDOs, CDS and ABCP turned sour as the US mortgage market turned down. These instruments thrive in the opaque, off-balance-sheet environment of modern financial engineering. But transparency is important. The modern world has audited accounts, and open exchanges, and 'public' companies for a good reason: because previous generations understood that when investment stops being open and transparent, and reverts to cosy secret deals, complex contracts, and big executive bonuses, then it is general investors who get cheated. Transparency helps stop these problems developing. In stark contrast to the burgeoning complexity of modern securities markets gold investment remains uniquely simple, and - dealt the right way - uniquely transparent. A solid gold investment sets you free from the risk of credit default or banking failures. Inflation Hedge

History of Gold

Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years. This is because when fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to arise along with everything else. Moreover, gold is seen as a good store of value so people may be encouraged to buy gold when they believe that their local currency is losing value.

Deflation Protection

Deflation is defined as a period in which prices decrease, when business activity slows and the economy is burdened by excessive debt, which has not been seen globally since the Great Depression of the 1930s (although a small degree of deflation occurred following the 2008 financial crisis in some parts of the world).. During the Depression, the relative purchasing power of gold soared while other prices dropped sharply. This is because people chose to hoard cash, and the safest place to hold cash was in gold and gold coin at the time.

Geopolitical Uncertainty

Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the "crisis commodity," because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union. Its price often rises the most when confidence in governments is low.

Supply Constraints

Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to Goldsheetlinks.com, gold saw a rebound in production with output hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.

Increasing Demand

In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world; it has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold (though it has taken a tumble in 2012.) In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast. Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as one of the world's largest holders of gold bullion in 2008, only four years after its inception.

A History of Holding Its Value

Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. Since ancient times, people have valued the unique properties of the precious metal. Gold doesn't corrode and can be melted over a common flame, making it easy to work with and stamp as a coin. Moreover, gold has a unique and beautiful color, unlike other elements. The atoms in gold are heavier and the electrons move faster, creating absorption of some light; a process which took Einstein's theory of relativity to figure out.