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Archive for the ‘Gold Trading’ Category
Gold ETF’s
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A gold ETF is an exchange-traded fund that tracks the price of gold. Gold ETF’s can be found on major stock indexes. One example is SPDR gold trust with the ticker symbol GLD; it is traded on the NYSE. The intention of these funds is to allow investors to invest in the price action of gold. Many of these ETF’s are not backed by gold, or are backed by only a very small amount of gold. The intention here is to speculate on the value of the spot price only. ETF’s will not give you the same protections that owning physical gold will.
How safe is it to own gold ETF’s in today’s economic climate? There are a few items to consider. Bear in mind ETF shares are not actually backed 100% by physical gold, but a combination of gold and a mechanism of derivatives. The actual amount of physical gold an ETF holds is rarely disclosed and covertly disguised in a labyrinth of accounting figures. Try asking a stockbroker what percentage of the ETF is physical gold, and furthermore if you wanted your gold, would you ever get it?
There is also counterparty risk involved in owning gold ETF’s. For example, in September 2008, shareholders in ETF Securities backed by AIG were unable to trade popular commodity securities, due to concerns over the future of their backer AIG. Banks and brokerages actually stopped making markets in the Exchange Traded Commodities (ETCs) backed by AIG, and sold by ETF Securities (ETFS). Consequently the price of the stocks also plummeted over 50% due to the concerns for AIG’s future.
Also remember the physical bullion used to back whatever portion of an ETF is confiscatable by the government. The U. S Government did in fact confiscate gold in 1933 due to extraordinary economic conditions. Should the current economic crisis reach that point again and the government again confiscates gold, the wealth insurance you need most will be taken away.Gold ETF’s can be more expensive to hold than physical gold. With physical gold there is a one-time fee. As opposed to ETF’s where there are many fees starting with one-time fees to buy and sell and annual fees like management expenses, insurance expenses, regulatory fees, exchange fees, accounting expenses, marketing expenses, legal expenses and storage expenses.
Gold ETF’s will give you exposure to the price action of gold, which is great for speculation purposes. What it can’t give you is the safety and security of owning the physical metal itself. Keep in mind physical gold will still give you access to price action.
Those people who decide to buy and own physical gold, their stored value remains more stable than those who own ETF’s. As the value of the dollar decreases, it takes more dollars to buy an ounce of real gold. The “share price” of actual solid gold does not deteriorate as a result of any financial meltdown. Indeed the value of these gold holdings is very likely to go up, and the gold price will continue to increase with the addition of more people seeing it as a safe haven in these stressful times.
Here are some examples of Gold ETF’s traded today:
Ultra Gold ProShares UGL
E-TRACS UBS Bloomberg CMCI Gold ETN UBG
PowerShares Global Gold & Prec Metals PSAU
iShares COMEX Gold Trust IAU
ELEMENTS MLCX Gold TR ETN GOE
UltraShort Gold ProShares GLL
SPDR Gold Shares GLD
Market Vectors Gold Miners ETF GDX
Market Vectors Junior Gold Miners ETF (GDXJ)
5 Reasons why Gold is a Good Investment Today
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1. Hedge against inflation
2. Hedge against a collapse of the U.S. Dollar
3. Bull Market
4. Diversification
5. Store of Value
Probably the number one reason why people are investing in gold today is due to a fear of inflation. Central Banks around the world have turned on the money spigots and began flooding banking markets around the world with liquidity. This has scared many people and rightfully so. Once all of this liquidity hits the hands of the people we are in for a serious bought of inflation, maybe even hyperinflation. I have read some statistics that have said that the Federal Reserve (which by the way is a private bank) had doubled the money supply in a year’s time. It will be difficult for the Fed to draw back in all of that liquidity. Although they want you to believe it will be easy for them. When inflation hits gold prices will continue to rise.
Some people are even more concerned that the U.S. dollar will not only hyper inflate, but that it will eventually collapse and become worthless paper. We have seen this happen many times throughout history, the most recent being Zimbabwe. Their currency was declared dead in April of 2009. Citizens of Zimbabwe began digging and panning for gold in order to scrape together enough grams of gold to be able to provide for their families. Gold goes a long way under these circumstances.
On a more positive note, gold can be played purely as speculation that the price will rise. We are in the middle of the 10th consecutive year of price appreciation. This is a strong bull market for gold, and many experts are calling for gold to reach $2,000 to $5,000 per ounce before the cycle ends. Therefore, putting money into gold now, if the experts are right, can be very lucrative.
Gold is always, first and foremost a portfolio diversifier. Gold typically performs better when stock, bonds, dollars and other paper assets do poorly. However there are times when gold does well in conjunction with paper assets, but typically gold and other precious metals will compliment your paper assets nicely, giving you appropriate diversification.
Gold has always been a store of value. For over 5,000 years gold has been coveted and treasured. Gold will never be worthless, while any paper asset can be rendered worthless under a variety of circumstances. Now gold can definitely decline in value but it will always be worth something. Governments and countries can collapse and companies can go bankrupt which would then render those respective paper assets worthless. Gold has no debt or any other encumbrance or decision maker attached to it other than you.
These times are proving to be the perfect time to own gold.
Is there a Current Floor to the Gold Price?
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Gold has been of value for over 5,000 years. Civilizations have risen and fallen, currencies have come and gone and yet gold still is coveted by people all around the world. Gold has never been worthless! It has always had some value to it; therefore it is different than most other asset classes. Stocks, bonds and paper currencies for example can all become worthless at some point.
But is there a floor under the price of gold? The simple answer is no. I am assuming that this question is pertaining to the government. Neither the U.S. Government, nor any other government has a floor price on gold. A floor price being the minimum a person or institution has to charge for it, or the lowest possible dollar amount it can fall to. Gold can free float as high or as low as the market’s action will allow. So the price is determined primarily by supply and demand. But there are technical tools that can help us understand the price action of gold.
This leads me to believe the question is this: what is the current support level on the price of gold? Most assets trade between support on the bottom and resistance on the top. These two figures are determined by previous market action. When an asset breaks a resistance level, that figure then becomes the new support level. The current support level on gold is $1,017 which was the last resistance level. The resistance level at the top is $1,218. Gold has not tested that level since it was set in December of 2009. In addition, recently gold has had difficulty breaking $1,045 on the bottom (the price at which India bought 200 metric tonnes from the IMF) and the $1,120 mark on the top. So I am calling $1,045 to $1,120 a smaller trading range within the technical trading range.
Should gold go below $1,045, look for it to test the $1,017 level. If gold breaks the $1,120 level on the top look for it to test the $1,218 mark. If gold should break the $1,218 level that would then be the new support level with the new resistance level being unknown because it has never been higher. If gold should break the $1,017 support level that would then become the new resistance level and the next support level would be around $1,000.
Technical language can be confusing, so if I have done so I apologize. In the simplest form, the current support level is $1,017 and the current resistance level is $1,218.
Gold, Long-Term Hold
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When investing in gold you will often hear it called a long-term investment. What exactly does long-term mean? You will typically hear precious metals companies refer to a long-term hold as a period from 3-5 years up to 10 years or possibly more. Where did this come from? It was illegal in the U.S. to own gold from 1933 to 1974, and prior to that gold was pegged to the dollar for 100’s of years. So owning gold bullion as an investment is a fairly new thing. Its track record is currently at 36 years. When compared to other investments that is a fairly short time frame.
If you are reading this blog for the first time then we must pause and differentiate between the two types of gold you can own, bullion and numismatic gold. These two types of gold have different strategies for ownership behind them and different spreads (see previous blog post). These factors will determine length of hold. For more on the different types you can read bullion and rare gold coins.
My thoughts on long-term hold and where it came from is this. When the dollar was removed from the gold standard in 1970 the price action was allowed to free float. The price of gold rose from $35 per ounce to $850 per ounce in January of 1980. That was a fast and significant rise in the value. From there gold fell to its low of $252 per ounce in 1999, with ups and downs all along the way. That was a fairly slow and significant fall. Because gold as an investment is a fairly new opportunity companies want to disclose to their clients that it may take a while to grow your gold’s value. Gold’s recent climb from $252 per ounce in 1999 to $1,115 where it stands today has been a fairly steady rising pace. So if you bought bullion in 1999 you would have realized over a 340% gain.
There are times when it has taken a few years to see your gold grow and there have been times when it would have taken many years to see your gold grow. This is why everyone needs to DIVERSIFY their portfolios.
When comparing the two different types of gold, bullion and numismatics, these tend to perform differently. If you look at a PCGS chart you can clearly see that over the past 40 years numismatics have outperformed gold bullion. This is due to a few factors that make it unique, but mainly it is rarity. Because the cost of doing business is higher, it will take you longer to make up the difference, which is another factor in “long-term.” It should be noted that bullion and numismatics do not move in lock step with each other. In fact from 1987 to 1989, bullion lost roughly 10% of its value while numismatic coins according to PCGS went up over 600%.
The net of this is that sometimes it can take a short period of time to cover your costs of doing business, and other times it can take years. That is why it is noted by companies to think long-term when it comes to gold ownership, because no body really knows. In addition, many people choose gold to protect against a collapsing dollar, and in that case it could be a very long hold.
What does it Cost to buy Gold
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Buying gold coins should be a process of discovery; for you and for you representative. You will begin to discover the ins and outs of owning gold in your portfolio and what it can do for you. On the other side your broker should discover what your goals and objectives are. Items like: are you more concerned with asset protection or growth, are you long-term or short-term, what are your concerns about the future, how much of your overall portfolio do you want in gold, as well as other questions that may arise.
These questions will help you both narrow down to the right type of gold and or silver that is right for you. Once you have a strategy in place it is easy to begin to acquire the appropriate precious metals for you. This can take place in one lump some or your strategy could include a plan to acquire pieces over time.
There are various costs of doing business in each category of gold and silver. Bullion gold or silver, meaning loose coins and bars of a more recent issue, typically can range anywhere between 2-10% on average throughout the industry. This is what is known as the spread. The spread is the difference between retail and wholesale. Typically you will buy at retail and sell at wholesale. Common dated numismatic gold coins with typically rage anywhere between 15-25% and better dated or rare gold coins will typically range between 25-35%. These are averages; some can be higher or lower depending on the company. Make sure to choose a company that discloses their spread verbally and in writing and that it is clear exactly what their spread is (not a range).
Do not be afraid of high spreads! You want to use the right tool for the right job. That might mean owning rare gold coins which fetch a higher premium. This type of gold has outperformed gold bullion in the mint state rare category (according to PCGS) close to 4-1 over the past 40 years, and has some other very important benefits that other types of gold do not have. This type is a typically a longer term hold. For these reasons it is important to understand your options and your goals, in order to apply the right tool for the right job.
How to Invest in Gold
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All portfolios need diversification. Diversification allows a portfolio to be well-rounded. While some assets in a portfolio go down others go up in order to offset those losses. This is the smart way to build for the future. The key is to acquire assets that are not closely correlated to each other, like gold and stocks, or gold and dollars.
People generally acquire gold in their portfolios in order to build in safety and stability. This is because when stocks fall dramatically more people flock to gold thus increasing the value of gold and offsetting losses. The same occurs when the dollar begins to fall. As the dollar losses value some of the increase in gold is due to the dollar falling, but most of the increase typically comes from predominant buying due to fear.
When acquiring any asset for diversification one should look into how that asset itself can be diversified. Stocks for example, can be bought in U.S. companies or foreign companies. Gold can also be diverse. There are two types of gold available; bullion and rare gold coins. Both will perform different tasks in a portfolio.
Bullion is typically used for pure asset protection. 1oz of gold today can buy roughly the same amount of goods that 1oz of gold could buy 100 years ago. Therefore it is known for keeping up with inflation. Also, in the event of a dollar collapse gold’s value would skyrocket.
Rare gold coins are typically used for asset protection plus growth. However inside of this asset class one can acquire coins that will perform differently. This is due to rarity factors. The rarer a coin is the better the opportunity for growth, and the more volatile. The less rare a coin is the more it will function like an asset protection type coin.
Once you have determined your goals and objectives with your portfolio, then you can decide what types of gold to acquire. Acquiring gold is smart, and history has proven its performance. Diversification is important in your portfolio and across asset classes.
Gold Outlook for 2010
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At the beginning of every year the “experts” come out with their predictions on the precious metals market. These predictions vary every year in their overall gold price target and timing, and should be taken as an estimate, a guide for your strategy. Never the less what is being predicted for 2010 is very exciting for those who own gold or may consider to buy gold coins this year.
James Turk
James Turk is well known for his predictions in the precious metals market. Since the 1970’s people have followed him religiously, in order to guide their decisions in the gold market. Mr. Turk got the price target for 2009 correct. He stated that gold would break $1,000 per ounce and hold above it into 2010. He is calling for gold to break $2,000 per ounce in 2010. The timing is not clear, just that it will break $2,000 this year. He also calls for a floor under gold of $1,050 per ounce, which is the price at which India bought 200 metric tonnes from the IMF at. He also states that we are in the second phase of a three phase bull market.
Rob McEwen
Rob McEwen is the chairman and CEO of U.S. Gold, a gold mining company. He was recently seen on Bloomberg and stated that he believes that gold will go to $2,000 per ounce this year and that it will go to $5,000 per ounce between 2012 and 2014. He states that this is due to the U.S. government printing dollars at an alarming rate and a lack of supply to meet worldwide demand.
Frank Holmes
Frank Holmes is the CEO of U.S. Global Investors. He states on Market Watch, that gold could break $2,300 per ounce which is its inflation adjusted high of $850 per ounce in 1980. He believes that this will be due to a shrinking supply of gold and worldwide inflationary pressures. He does not say exactly when this will occur, but that he believes that it will occur.
There are many more predictions that you can find if you search for them. Even Merrill Lynch is predicting higher gold prices for 2010. This is encouraging news for those that own gold or are considering entering the market today. If someone bought gold today at $1,133 per ounce and it went to $2,000 an ounce by the end of 2010, that would be an increase of 76%!
Rare Gold Coins Outperform Gold Bullion
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Gold has been in a positive trend since 1999. We have seen gold come from $252 per ounce in 1999 to as high as $1,225 per ounce at the end of 2009. Over that 10 year period is a 386% gain. Over an even longer period of time we have seen gold come from $35 per ounce in 1970 to that same $1,225 mark in 2009. That is a 3,400% increase! But what have rare gold coins done over that same time frame?
According to PCGS, Mint State Rare Gold Coins have performed even better that gold bullion since 1970. On their site, a $1,000 acquisition of mint state rare gold coins in 1970 would be worth $114,489 today. That is an 11,348% increase! That means that rare gold coins have outperformed gold bullion close to 4 to 1 over the past 40 years.
There are a few factors as to why this has occurred. Gold bullion only has the value of the gold content itself. If you own a 1 ounce gold bullion coin, like an American Eagle, then it is worth 1 ounce of gold. Rare gold coins also posses the intrinsic value of gold. A $20 Liberty minted between 1849 and 1907 contains one ounce of gold, so therefore it will never be worth less than the gold content itself. However, rare gold coins also have value do to their quality and rarity. However, the main factor that contributes to their value is supply and demand forces. No one can mint coins prior to 1933, therefore supply is limited. As demand heats up, supply becomes tighter and the value goes up. Gold bullion is being mined everyday, therefore supplies are constantly increasing.
Quality and rarity of any particular coin play a large role in its specific value. The higher the quality the more valuable it will be. The same goes for rarity, the more scarce a coin is the more valuable it will be. Rarity is easily determined. PCGS keeps a population count for every coin ever minted in the U.S. in every grade. PCGS has also made grading simple. PCGS and NGC grade coins on a scale from 1-70, 70 being perfect condition. Where you find the performance is in the mint state category, which runs from 60 to 70.
You can see that if you have a high grade mixed in addition to a very rare coin the value would be very high compared to a coin that is of a lower grade and rarity. In fact one coin, the 1933 $20 Saint Gaudens, which was at the time considered to be the only one in existence, sold at auction for $7.5 million. Values range from a few thousand dollars per coin up to that amazing $7.5 million value. Buy rare gold coins.
Gold and the US Dollar
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Gold and the U.S. Dollar were pegged for much of our history as a country. We started minting gold coins as currency in 1795, which were interchangeable into paper dollars. We stopped using gold coins as currency in 1933 when president Franklin Delano Roosevelt called in all gold bullion in order to revitalize the economy during the great depression. At the time of the confiscation gold was pegged to the dollar at $20 per ounce. After the confiscation was completed the government revalued gold at $35 per ounce, thus robbing the wealth of all paper dollar holders by 42%.
Gold remained pegged to the dollar at $35 per ounce until 1971 when Nixon closed the gold window and removed us from the gold standard all together. It should be noted that from 1933 to 1974 it was illegal to own gold bullion, but one could own numismatic gold as it was excluded from confiscation.
The dollar and gold were then allowed to free float as it does today. Some of the gains and losses in gold on a day-to-day basis can be attributed to the U.S. dollar but some of it comes from predominant buying and selling.
Gold and the dollar fluctuated in step with each other until June of 2005. Prior to this date if the dollar was down gold was up and vice versa. In June of 2005 gold and the U.S. dollar decoupled from each other, and since then gold and the dollar have risen and fallen together and sometimes moved in opposite directions. They are not directly tied to one another. However, if the dollar decreases in value, the gold price in terms of dollars will rise. For example, gold today is up $18.60 as of this writing, and the dollar is down .15 to 77.48. Out of the $18.60 increase, $2.10 is due to a declining dollar and $16.50 is due to predominant buying.
As time goes on we fully expect the dollar and gold to function as two separate currencies. However if the U.S. has to return to a gold standard, gold will once again be pegged to the dollar.
What’s Really Happening in the Gold Market Today?
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Gold just like any other market is subject to supply and demand factors. When supply is low and demand is high the price goes up and vice versa. To understand the gold market one must understand the term “spot” price.
Gold, mankind’s universal and timeless money and store of value, it is traded in many ways. The easiest and most direct way, and the way that governs millions of transactions every day, is cash payment followed by immediate delivery. In these transactions, the agreed upon benchmark price is called the “spot” price. Another term frequently used term for this type of transaction is the “cash” price. Many major gold brokers set a minimum number of ounces for a transaction at the spot price.
New buyers sometimes mistake a futures price for the spot price. They are not the same. A futures price is a market-generated quote for delivery of a fixed amount of gold (frequently 100 ounces) at a specific time in the future. This price will be higher than that moment’s spot (cash) price because 1) it must include fees for storage and delivery of the gold, and 2) finance charges because payment will not be made until the delivery date.
Another spot-related factor gold investors frequently neglect is transaction size. Ten transactions of 10 ounces require a lot more time, expense, and effort on the part of a broker than one transaction of 100 ounces. In the international world of gold trading, size matters. Most buyers of gold do not buy at the spot price because the size of the transaction is too small. Most buyers are paying spot plus a premium. When supply is low the premium increases. Today expect to pay higher than $100 above the spot price for 1 gold bullion coin.
What you see being reported on everyday is the spot price of gold, and on an average day around 24 million ounces trades hands. You may have noticed that gold has been rising for around 10 years. Two major factors have contributed to this rise, liquidity and fear. So much money has been printed by the FED that it has to go somewhere. This liquidity raised all ships for a while. Real estate, stocks and gold all rose together for a window of time this decade.
Then we saw the collapse of the banking system in 2008 which has created fear, and gold values rose rapidly over the last year, from $870 per ounce at the end of 2008 to where it stands today at $1,137. Fear of inflation or a collapsing dollar will continue to put upward pressure on gold prices. In short, fear is what is driving the gold market today.
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