Traditionally people tend to believe that gold is the best and safest investment of all investments. While there is some truth to it, it is not completely true.
This belief system has been passed over generations, and so it became one of the safest investment that people tend to hold for ever. It is more of an emotional investment than a financial investment. We know from historical data that the gold price goes up in value over a period of time, and was grown exponentially in last two decade. It should also be noted that Gold value is inversely proportional to paper currency such as the U S dollar. When the value of US dollar goes up, the value of gold goes down, and vice versa. It is true with any currency, but the valuation of Gold in terms of US dollar gets global attention because of its status as world's dominant reserve currency.
Stock market is driven by mass human emotion. Any fear and uncertainty in the economy will pull the money out of the stock market, and push it to safer investment such as gold. With gold becoming a commodity that can be traded online, it is becoming more like a world's currency. Supply and demand of Gold in the world market decides its ultimate market value. Gold in its pure form is indestructible. It does not rust, corrode and cannot be destroyed by fire. Gold can neither be created nor destroyed, it can only be changed from one form to another.
Gold as a currency does fluctuate, but does not lose its value. Unlike a paper currency with the value printed on it, gold has an intrinsic value. To begin with, It is not paper, it is physical gold and a precious metal that will always carry a decent value in the market. In this regard, it is for sure be considered a safest investment. Is it a great investment? The answer is NO.
In today's value, 1kilo of gold costs around $37,538. This is lot of money, and there are no financial service available to take a loan if you do not have enough money to buy this asset. Moreover if you can buy this asset today, then you need to find a safe deposit box to store it. There is an additional cost just to store it. Now instead of buying physical gold, what if you decided to buy a gold producing company ?
Physical Gold vs Gold Stock
Gold producing company is similar to any other business that are listed in the stock exchange. The only difference here is, the product produced is Gold. In any other businesses, the new product holds a higher value, but the price goes down in value as time goes on. After certain period, the product will be discontinued either because there is no demand for it, or it is not relevant anymore. It is not the case with Gold producing company. Historical data on gold price shows that gold price keep increasing in value as time goes on. Like any other commodity, the price fluctuates in the short run, but gold has a price advantage when invested in long term. There are good companies and not so good companies. The operational efficiency and the management of the business clearly differentiates between the good and the not so good ones. Invest in a company that has good management and high operational efficiency, and you are on your way to a great investment.
For example, Let's take Goldcorp Inc. It is one of the largest gold producer in the world. At the time of writing this article, the company stock trades at $15.88 per share. On the other hand, the gold price is also down to $37,538 per Kilogram. For the amount of 1 kilogram of gold you can own 37,538/15.88 = 2363 shares of Goldcorp company. The company has a dividend yield of 3.78%, which translates to a cash payment of $0.05 per share every month. In dollar amount, the cash flow is $118.15 paid to its investors in the form of dividend every month, and there is no need for any storage cost. Since this is a Canadian company, there is a 15% tax withholding which translates to a deduction of $17.72 from the dividend amount every month. For a person living in US, You can avoid this tax by investing in a U.S. based company. To check the real time value of the stock, check out this link - GG
Pls. note: Stock investment is riskier investment than investing in physical gold. In our example scenario, a dollar increase or decease in stock value will result in gain or loss of $2363 respectively.
Let's say in next ten years the gold value doubles, this will result in more than doubling of both the stock value and the dividend yield paid out to investors every month. At the end of tenth year, you should have doubled your investment while still holding the asset in the form of stocks. In addition, you will have a consistent cash flow of the profit distributed in the form of dividend. The dollar value adds up to a considerable amount as years goes on. You can liquidate the asset at anytime and get your money almost immediately. As an investor you also have the option to reinvest the dividend amount on the same company, increasing your ownership stake with the business. This will further increase the dividend payment as time goes on.
Now let's consider the situation where the gold price remained the same for the next ten years, this will result in the stock value and the dividend to remain the same for the next ten years. Even in this situation, you still will not lose money, and will have significant amount in hand in the form of the dividend at the end of tenth year. Usually big producers buy out small competitors and consolidate the operations in order to reduce the cost involved in extracting the gold, thereby increasing the operational efficiency. This will lead to more cash in hand as they go up gobbling more companies while still maintaining a decent cash flow every month.
Gold vs Currency
When we start talking about Gold, we definitely need to talk about the world reserve currency. The worlds reserve currency has a significant influence on gold valuation and vice versa.
U.S. Dollar: U S dollar is the worlds largest and dominant reserve currency. It is powered by the economic powerhouse of the United States of America. U.S. GDP estimated to be close to $18 trillion as of 2015 - It is world's largest national economy. Due to the sheer size of the economy, the stock market and the US dollar is subjected to highs and lows, when pushed further the economy turns into boom and bust. This has major impact in the valuation of the U.S. dollar.
Euro: Euro is the worlds second largest reserve currency. It is euro zone's official currency consisting of 19 out of 28 member countries. There are some fundamental weakness associated with this currency. Euro provided an alternate to the dominant US currency, but the formation of euro was more of an emotional decision than an intellectual decision. This conclusion was based on two main reason. First reason, It is hard to comprehend why any country would give up their right to print money, and the power to influence and control their currency. Second reason, I am saddened to see the way euro zone is handling Greece financial crisis. I agree that Greece did not handle their finance responsibly, but these kind of situation is bound to happen to any country during its lifetime. The talk about Greece exit is ridiculous. If Greece exits, who is next ? Looking at the economic data of the member state, it could be Spain ?. These kind of situation undermines the stability of the currency. Greece will do just fine with or without Euro in the long run, what happens in the short-run is anybody's guess. Freedom of movement within eurozone is great, but common currency not a good idea. The euro currency is vulnerable to the economic condition of the euro zone member states, and that makes it unsustainable in the long run.
Gold: Gold is the unofficial world's currency. It has been like this for thousands of years. If you want a comparison, then Gold can be compared to modern day stock exchange indices. Both tend to go in opposite direction under similar circumstance. Fear and uncertainty in world economy increases the demand for gold, and thereby increase the value of the gold assets, whereas the same circumstance pushes people to withdraw money from the stock market, lowering the value of stock indices and in some cases causing stock market exchange to crash. Gold has been the safest investment for a long time, and will remain so in the future.
Gold has a distinct advantage when compared to any other investment assets. Mainly because, the moment you own it, it belongs to you. Unlike real estate, where you still have to pay the property tax even after you own the asset in full, You really own it in full when it comes to Gold asset. You can store your gold asset in a safe deposit box, or under ground or inside your mattress. It does not matter what you do with it. You own a piece of asset that will not lose its value and its shine for ever. The reason it is not the best investment is because it does not have utility value when compared to other assets. For example, real estate asset serve the community with the much needed housing service, while still maintaining a steady cash flow to its investors in the form of rent. Stock investment serves the community in building and expanding businesses to create goods and services, and supports livelihood, while still maintaining a steady cash flow to its investors in the form dividends. In the case of Gold, the asset is not working and if you are long term investor who don't have any plan to sell it, then you are not going to see a dime from this asset.
In addition to financial value, gold carries an emotional value. So it is hard to beat any other investment when the investors are deeply emotional involved with this asset. It requires a great deal of emotional strength, and logical thinking to see this investment as a logical asset instead of an emotional asset. Gold price is going through some rough times recently. That is mainly because of two main reason, The financial crisis of 2007-2008 caused lot of uncertainty in modern day banking system. It is due to this crisis, people around the globe were scared about their financial future and economic condition. This caused safe assets such as Gold to sky rocket to new heights. When the economy started to improve and stabilize, the gold value started to come down to its expected market value. Descent in gold value within a short period of time panicked investors, and that caused further destabilization in gold prices. It is getting stabilized now to new market value. The other reason why gold price is hovering around 1180 per oz is because of the US dollar strength.
Currently the US dollar is getting more expensive which turn put pressure on gold price to go down. Due to this, gold miners are struggling to keep up with their profit margin, most companies are trying ways to reduce the operation expense and be more effective in their cost in mining the gold. This is good and bad for gold producers. It is bad because, companies that has higher cost to produce gold will either collapse or be forced to sell to bigger rivals if gold value further goes down. The good part is, consolidation is good for this industry. During good times, there are lot of gold producing companies flooded the market which are inefficient in their operation. These companies are flying high for a pretty long time, and the situation like this will force them to evaluate their operation efficiency and get serious about return on their investment.
Advantages of Investing in Physical Gold:
Protects your savings - Investment in Gold protect savings from currency devaluations. In does not matter where you live, compare the value of the gold against your local currency ten years ago vs the current value. You will see the value of the gold is gone up considerably. That is mainly because the devaluation of the currency over a period of time.
Gold is Precious - It is a precious metal, and carries an intrinsic value. It is a metal that has great demand in manufacturing items such as jewelry to electronics equipment. Unlike paper currency, Gold will never lose its value. In the case of paper currency the value depends on various factors, key factors include the economic strength of the country and the purchase power by its people.
Advantage in Gold Valuation - Gold valuation is solely based on supply and demand in the world market. Gold cannot be created, it has to be extracted from the mines. It is precious metal, and the demand is always high as it is considered a safe asset. It is due to this situation, it is subjected to higher prices in the world market.
Emotional Asset - For most people, money is an emotional thing. In order to protect the money from inflation, people tend to lock in their money in safe assets such as Gold. It does not have an economical value in the society, it does not have an utility value that can generate cash, but it brings in an emotional strength to its investors. This makes Gold a priceless asset.
Disadvantages of Investing in Physical Gold:
No cash flow - Unlike other asset classes, investment in physical gold does not generate any cash. This is one of the reason why some of the investors stay away from investing in gold.
No financing or leverage available - There are no bank loans that you can use to leverage your financial investment when it comes to gold investment. Requires liquid cash to invest in gold.
No tax advantages - There is absolutely no tax benefits in investing in Gold.
Not a liquid asset - Gold in any form - Bars, coins or jewellery cannot be converted into cash immediately. Require some effort to take it to the seller and convert it into cash.
Requires safety deposit box - Gold in large quantities requires a secure place to store. It is not safe or secure place to store such a large amount of gold at home. Usually it is better to store it in a bank's safety deposit box.
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| Image courtesy of ponsulak at FreeDigitalPhotos.net. |
This belief system has been passed over generations, and so it became one of the safest investment that people tend to hold for ever. It is more of an emotional investment than a financial investment. We know from historical data that the gold price goes up in value over a period of time, and was grown exponentially in last two decade. It should also be noted that Gold value is inversely proportional to paper currency such as the U S dollar. When the value of US dollar goes up, the value of gold goes down, and vice versa. It is true with any currency, but the valuation of Gold in terms of US dollar gets global attention because of its status as world's dominant reserve currency.
Stock market is driven by mass human emotion. Any fear and uncertainty in the economy will pull the money out of the stock market, and push it to safer investment such as gold. With gold becoming a commodity that can be traded online, it is becoming more like a world's currency. Supply and demand of Gold in the world market decides its ultimate market value. Gold in its pure form is indestructible. It does not rust, corrode and cannot be destroyed by fire. Gold can neither be created nor destroyed, it can only be changed from one form to another.
Gold as a currency does fluctuate, but does not lose its value. Unlike a paper currency with the value printed on it, gold has an intrinsic value. To begin with, It is not paper, it is physical gold and a precious metal that will always carry a decent value in the market. In this regard, it is for sure be considered a safest investment. Is it a great investment? The answer is NO.
 |
| Units: 1 Kg(Kilogram) = 35.274 oz(Ounce) 1 oz(Ounce)= 28.3495 g(Gram) Chart from http://goldprice.org |
In today's value, 1kilo of gold costs around $37,538. This is lot of money, and there are no financial service available to take a loan if you do not have enough money to buy this asset. Moreover if you can buy this asset today, then you need to find a safe deposit box to store it. There is an additional cost just to store it. Now instead of buying physical gold, what if you decided to buy a gold producing company ?
Physical Gold vs Gold Stock
Gold producing company is similar to any other business that are listed in the stock exchange. The only difference here is, the product produced is Gold. In any other businesses, the new product holds a higher value, but the price goes down in value as time goes on. After certain period, the product will be discontinued either because there is no demand for it, or it is not relevant anymore. It is not the case with Gold producing company. Historical data on gold price shows that gold price keep increasing in value as time goes on. Like any other commodity, the price fluctuates in the short run, but gold has a price advantage when invested in long term. There are good companies and not so good companies. The operational efficiency and the management of the business clearly differentiates between the good and the not so good ones. Invest in a company that has good management and high operational efficiency, and you are on your way to a great investment.
 |
| GoldCorp Stock Quote:GG - 1 Share cost $15.88 - 2363 Shares cost $37,524 I kilo gold cost $37,538 |
For example, Let's take Goldcorp Inc. It is one of the largest gold producer in the world. At the time of writing this article, the company stock trades at $15.88 per share. On the other hand, the gold price is also down to $37,538 per Kilogram. For the amount of 1 kilogram of gold you can own 37,538/15.88 = 2363 shares of Goldcorp company. The company has a dividend yield of 3.78%, which translates to a cash payment of $0.05 per share every month. In dollar amount, the cash flow is $118.15 paid to its investors in the form of dividend every month, and there is no need for any storage cost. Since this is a Canadian company, there is a 15% tax withholding which translates to a deduction of $17.72 from the dividend amount every month. For a person living in US, You can avoid this tax by investing in a U.S. based company. To check the real time value of the stock, check out this link - GG
Pls. note: Stock investment is riskier investment than investing in physical gold. In our example scenario, a dollar increase or decease in stock value will result in gain or loss of $2363 respectively.
Let's say in next ten years the gold value doubles, this will result in more than doubling of both the stock value and the dividend yield paid out to investors every month. At the end of tenth year, you should have doubled your investment while still holding the asset in the form of stocks. In addition, you will have a consistent cash flow of the profit distributed in the form of dividend. The dollar value adds up to a considerable amount as years goes on. You can liquidate the asset at anytime and get your money almost immediately. As an investor you also have the option to reinvest the dividend amount on the same company, increasing your ownership stake with the business. This will further increase the dividend payment as time goes on.
Now let's consider the situation where the gold price remained the same for the next ten years, this will result in the stock value and the dividend to remain the same for the next ten years. Even in this situation, you still will not lose money, and will have significant amount in hand in the form of the dividend at the end of tenth year. Usually big producers buy out small competitors and consolidate the operations in order to reduce the cost involved in extracting the gold, thereby increasing the operational efficiency. This will lead to more cash in hand as they go up gobbling more companies while still maintaining a decent cash flow every month.
Gold vs Currency
When we start talking about Gold, we definitely need to talk about the world reserve currency. The worlds reserve currency has a significant influence on gold valuation and vice versa.
U.S. Dollar: U S dollar is the worlds largest and dominant reserve currency. It is powered by the economic powerhouse of the United States of America. U.S. GDP estimated to be close to $18 trillion as of 2015 - It is world's largest national economy. Due to the sheer size of the economy, the stock market and the US dollar is subjected to highs and lows, when pushed further the economy turns into boom and bust. This has major impact in the valuation of the U.S. dollar.
Euro: Euro is the worlds second largest reserve currency. It is euro zone's official currency consisting of 19 out of 28 member countries. There are some fundamental weakness associated with this currency. Euro provided an alternate to the dominant US currency, but the formation of euro was more of an emotional decision than an intellectual decision. This conclusion was based on two main reason. First reason, It is hard to comprehend why any country would give up their right to print money, and the power to influence and control their currency. Second reason, I am saddened to see the way euro zone is handling Greece financial crisis. I agree that Greece did not handle their finance responsibly, but these kind of situation is bound to happen to any country during its lifetime. The talk about Greece exit is ridiculous. If Greece exits, who is next ? Looking at the economic data of the member state, it could be Spain ?. These kind of situation undermines the stability of the currency. Greece will do just fine with or without Euro in the long run, what happens in the short-run is anybody's guess. Freedom of movement within eurozone is great, but common currency not a good idea. The euro currency is vulnerable to the economic condition of the euro zone member states, and that makes it unsustainable in the long run.
Gold: Gold is the unofficial world's currency. It has been like this for thousands of years. If you want a comparison, then Gold can be compared to modern day stock exchange indices. Both tend to go in opposite direction under similar circumstance. Fear and uncertainty in world economy increases the demand for gold, and thereby increase the value of the gold assets, whereas the same circumstance pushes people to withdraw money from the stock market, lowering the value of stock indices and in some cases causing stock market exchange to crash. Gold has been the safest investment for a long time, and will remain so in the future.
Gold has a distinct advantage when compared to any other investment assets. Mainly because, the moment you own it, it belongs to you. Unlike real estate, where you still have to pay the property tax even after you own the asset in full, You really own it in full when it comes to Gold asset. You can store your gold asset in a safe deposit box, or under ground or inside your mattress. It does not matter what you do with it. You own a piece of asset that will not lose its value and its shine for ever. The reason it is not the best investment is because it does not have utility value when compared to other assets. For example, real estate asset serve the community with the much needed housing service, while still maintaining a steady cash flow to its investors in the form of rent. Stock investment serves the community in building and expanding businesses to create goods and services, and supports livelihood, while still maintaining a steady cash flow to its investors in the form dividends. In the case of Gold, the asset is not working and if you are long term investor who don't have any plan to sell it, then you are not going to see a dime from this asset.
In addition to financial value, gold carries an emotional value. So it is hard to beat any other investment when the investors are deeply emotional involved with this asset. It requires a great deal of emotional strength, and logical thinking to see this investment as a logical asset instead of an emotional asset. Gold price is going through some rough times recently. That is mainly because of two main reason, The financial crisis of 2007-2008 caused lot of uncertainty in modern day banking system. It is due to this crisis, people around the globe were scared about their financial future and economic condition. This caused safe assets such as Gold to sky rocket to new heights. When the economy started to improve and stabilize, the gold value started to come down to its expected market value. Descent in gold value within a short period of time panicked investors, and that caused further destabilization in gold prices. It is getting stabilized now to new market value. The other reason why gold price is hovering around 1180 per oz is because of the US dollar strength.
Currently the US dollar is getting more expensive which turn put pressure on gold price to go down. Due to this, gold miners are struggling to keep up with their profit margin, most companies are trying ways to reduce the operation expense and be more effective in their cost in mining the gold. This is good and bad for gold producers. It is bad because, companies that has higher cost to produce gold will either collapse or be forced to sell to bigger rivals if gold value further goes down. The good part is, consolidation is good for this industry. During good times, there are lot of gold producing companies flooded the market which are inefficient in their operation. These companies are flying high for a pretty long time, and the situation like this will force them to evaluate their operation efficiency and get serious about return on their investment.
Advantages of Investing in Physical Gold:
Protects your savings - Investment in Gold protect savings from currency devaluations. In does not matter where you live, compare the value of the gold against your local currency ten years ago vs the current value. You will see the value of the gold is gone up considerably. That is mainly because the devaluation of the currency over a period of time.
Gold is Precious - It is a precious metal, and carries an intrinsic value. It is a metal that has great demand in manufacturing items such as jewelry to electronics equipment. Unlike paper currency, Gold will never lose its value. In the case of paper currency the value depends on various factors, key factors include the economic strength of the country and the purchase power by its people.
Advantage in Gold Valuation - Gold valuation is solely based on supply and demand in the world market. Gold cannot be created, it has to be extracted from the mines. It is precious metal, and the demand is always high as it is considered a safe asset. It is due to this situation, it is subjected to higher prices in the world market.
Emotional Asset - For most people, money is an emotional thing. In order to protect the money from inflation, people tend to lock in their money in safe assets such as Gold. It does not have an economical value in the society, it does not have an utility value that can generate cash, but it brings in an emotional strength to its investors. This makes Gold a priceless asset.
Disadvantages of Investing in Physical Gold:
No cash flow - Unlike other asset classes, investment in physical gold does not generate any cash. This is one of the reason why some of the investors stay away from investing in gold.
No financing or leverage available - There are no bank loans that you can use to leverage your financial investment when it comes to gold investment. Requires liquid cash to invest in gold.
No tax advantages - There is absolutely no tax benefits in investing in Gold.
Not a liquid asset - Gold in any form - Bars, coins or jewellery cannot be converted into cash immediately. Require some effort to take it to the seller and convert it into cash.
Requires safety deposit box - Gold in large quantities requires a secure place to store. It is not safe or secure place to store such a large amount of gold at home. Usually it is better to store it in a bank's safety deposit box.
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