Thursday, September 23, 2010

Gold Knowledge

Many years of garnering market wisdom has taught me the value of prudence and patience, and that youthful exuberance is always the last refuge of the inexperienced. Sooner or later their bubble will burst - and market focus will return to seek cyclic intrinsic values and traditional refuge investment vehicles.

Gold Facts

Gold is a real universal currency. It can be exchanged into local currency of any country at any time. In other words, the Gold is fully convertible currency in real terms. It never loses its quantitative value – If you buy 10 grams today, it will remain 10 grams even after 50 years.

Further, it is purest form of metal which never gets tarnished or loses shine. If you throw anything into fire, it will be burnt to ashes, not Gold. It will shine. Go to any jewelers’ shop for polishing the gold. Some old fashioned jewelers use the ordinary flame (gas or even candle) to purify or polish the gold to its original finish. (No chemicals are needed). It is the only inert metal not affected by any acid or base.

According to my research, the United States has frittered away most of its gold by lending to hedge funds for shorting operation. It will never come back. They shorted it in $250~$350 range. now the gold is at $1,290. They are losing over $700 per Troy Ounce.

The Treasury/FED shows holding of 8134 tons of gold which has remained constant for over years. However, the loss of gold has been cleverly concealed in the form of “Earmarked Gold” and tricky language.

Although United States has 8134 tons of gold physically, it has lost title to it for almost 6297 tons of gold.

The world production of gold is about 2500 tons. If the loss of 6297 tons of gold by United States becomes public knowledge, hell will let lose in the gold market, and shorts will rush to the market to cover their position.

Before Buying GOLD

Consider the following factors:
  1. Like any investment product, before you buy anything, consider the most important thing – whether you can sell as easily as you can buy? If your answer is NO, do not buy that form of Gold. PERIOD
  2. In which country you are buying – in a country with convertible currency or in a country with non convertible currency regime with fixed or pegged rates. Examples: US, UK, Australia, New Zealand, Euro, Canadian dollars, Singapore dollars
  3. If you are buying outside your country, you will be taking exchange risk of the foreign currency vs. domestic currency. This could be advantage or disadvantage.
  4. Do you want to buy in Physical or Paper form? The rule is physical is physical and paper is paper. I personally never trade physical for paper – that is my self discipline. But you as investor may decide which form suits you best.
    1. We live in internet age. If war erupts, the very first casualty is Internet. If the World War III erupts, the paper based gold will simply disappear. You can not even access your account over the net. The bank or broker can also refuse to pay saying that their server is down
    2. When you buy paper, you rely on the credit worthiness of the bank or the broker. You know pretty well how worthy the top banks are. Many brokers like Lehman Brothers, Barings have simply disappeared. Thus, your investment could still turn zero if you deal in paper gold.
    3. If political stability of the country where you live is not so good, and if you are an alien (immigrant), do not take chance with paper gold. If your ethnic community is driven out (the way Jews were driven out by Hitler, Indians by Idi Amin in Uganda, and Military Junta in Burma), the paper investment could turn zero.
    4. Still, paper form is good so long as the orderly market for papers exist. Unless major banks sink to the bottom of the sea and financial crisis deepens further (which I believe it will), the physical gold will win over the paper.
  5. If you decide to buy physical gold, decide whether it is
    1. for investment purpose or savings purpose. Most Indian women will not let their family members to sell gold even if the prices may have risen 3 times. They consider outgo of gold as bad omen for their prosperity, especially if you have bought ornaments instead of gold bars or lagdi (another form of gold bar. This term is used in India. They also call “Biscuits” because some rectangular bars look like Biscuit. The round shape is often called “lagdi”.)
    2. Never buy investment gold in ornamental form. The dealer usually charge 10% to 20% more while buying and also deducts 10% when you wanted to sell. Thus, if the gold has not risen by 30% at least, you do not make any profit.
    3. For Investment purpose, buy only 999 or 9999 gold. They are easily saleable in any retail market.
    4. Do not buy larger unit, say 100 oz. Buy in multiples of 1 or 5 ounces or 1 to 5 taels (in Hong Kong). If you have bought from the bank, the bank will instantly pay you on spot.
    5. However, if try to sell to a gold dealer (say in India), you take a trading risk. You deliver gold to a dealer who will pay you after 3 or 4 days. If the dealer has existed for long time, then the risk is reduced. While selling to a gold dealer, who will pay only after a few days, sell it bit by bit that is in small lots at one time. Until previous payment is cleared, do not sell any more.
    6. If you decide to sell gold in a country like India, and you have to wait for 3 or 4 days, better sell against invoice (even if you have to pay 2% tax), so that you have proof that you delivered the gold to him and payment is due from the dealer (must be mentioned on the invoice itself)
    7. If you do not have storage space in your home and you do not have bank locker, do not buy physical gold. Instead, consider Gold ETF where the ownership is secured in the form of statement from broker or authorities. Other instruments like Paper Gold may also be a good substitute.