Gold

“The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings”, Paul Volker, ex-Fed Chairman, is quoted as saying recently.  Gold, on the other hand, has had a long, steady price increase that has always met or exceeded inflation rates.  Even though gold is recovering from 20 year lows, but now, with prices well over $1,000 per ounce, it is providing a different kind of investment strategy in today’s volatile world markets.  Gold is a very rare metal that is in finite supply and by placing physical gold in your portfolio it will stand like a sentinel for your financial assets and guardian for your retirement nest egg.  The only ‘real’ money is gold, especially when a fiat currency (paper money with no backing) becomes worth less and less.  Gold provides both security and liquidity.

During times of world turmoil, depressions, wars and economic crisis, people crave financial security and owning physical gold can answer that need.  Traditional investment strategies are becoming more and more obsolete and every investment portfolio should hold some physical gold.

In 1933, Roosevelt’s Executive Order declared it illegal for American citizens to own gold.  Americans were forced to hand over all their gold on or before May 1, 1933 or face 10 years in prison.  Paper dollars replaced the gold.  One type of gold, however, was recognized as having special value to collectors and was not confiscated.  Those coins were numismatic (collectable) and semi-numismatic (semi-collectable) gold coins.

Americans have been allowed to own gold since 1975 but could gold be confiscated again?  Yes, it could but collectible gold coins have been and are still excluded from confiscation.

Frighteningly, nearly every investment we make today is highly visible and reportable to the government.  With new regulations and transaction reporting laws, nearly everything from cash, cashier’s checks, money orders and even some forms of gold are reportable.  Your privacy, which was supposed to be guaranteed by the Constitution’s 4th Amendment, seems to have disappeared all together when it comes to your investments.

Coin dealers are now required by law to report the sale of your bullion coins sold to them to the IRS.  However, coins with a 15% premium do not have to be reported when sold to a coin dealer.  The semi-numismatic $20 Liberty and $20 St. Gauden gold coins have premiums well above 15% and, therefore, are non-reportable.  Currently the semi-numismatic $20 Liberty and St. Gauden gold coins have a 40-90% premium over bullion.

The premium on Semi-numismatic $20 gold coins has recently grown to 100% and could potentially rise even higher.  While bullion coins are minted each year by the millions, semi-numismatic coins are in a very limited supply and nearly 100 years old so when gold goes up semi-numismatic coins typically double.

A Little Gold History

Gold has been mentioned in the Bible where we learn that in the land of O Havilah there is gold and that gold of the land is good (Genesis 2:10-12).  Gold, having always been used as money, has a long, complex and illustrious history and is the oldest precious metal known to man.

The founder of the first Egyptian dynasty, Menes, in 3100 B.C. in his Code of Menes (a gold-to-silver ratio), stated that “one part of gold is equal to two and one half parts of silver in value.”  This was history’s earliest relationship between gold and silver.  Gold was considered the glory of the immortals by Homer in the “Iliad and the Odyssey.”  And, some of the oldest pieces of gold Egyptian jewelry were found in Sumeria in the third millennium B.C. in the tombs of Queen Zer and Queen Pu-abi of Ur.

Gold was coined more than 3,000 years ago in 50 B.C. by the Romans, and is still known as a symbol for wealth and power.  Talented gold artisans in Rome created gold jewelry and later the use of gold expanded into household items and furniture in the homes of the wealthy.  The Romans even wore necklaces that contained coins with images of the emperor in the third century A.D.  When Christianity spread throughout Europe, the dead were no longer buried with their jewelry; so, much of the gold jewelry from the Middle Ages does not exist today, except from royalty and the churches of that era.

Pre-Columbian cultures used gold long before the arrival of the Spanish.  They mastered most of the artisan’s techniques known by Europeans and were very adept in filigree, granulation, pressing and hammering, inlay and lost wax methods.  The Spaniard’s melted down most of their jewelry so very little remains today except for those removed from modern excavations and gravesites and most of the gold deposits from that time period are found in the Andes and in Columbia.

During America’s gold rush days, the discovery of gold brought thousands of settlers to the western states.  Many prospectors settled in California at Sutter’s Mill in 1848.  Gold rushes also occurred in Alaska, Australia in 1951, South Africa in 1884 and Canada in 1897.

London has been considered the metals trading center of the world, beginning in the late 17th century, and the birthplace of the official gold price.  Other nations became important gold market participants in the 19th century with the California gold rush, the Australian and South African gold rushes as well and there became a significant increase in the global supply.  The gold trade bypassed London for the first time.

Several countries adopted the gold standard in the 1800’s which caused London to lose some of its authority as the world’s gold ‘center.’  The gold standard stabilized our global economy by dictating that all the world’s currencies had to hold a corresponding amount of gold in its reserves.  Great Britain was the first to adopt a gold standard in 1821 and in the 1870’s, Europe followed and remained in effect until the end of WWI.  The U.S. was the only country that still honored the Gold Standard after the war but with the arrival of the great depression the end of the U.S. export of gold came to an end in the 1930’s.

The Bank of England signed an agreement with seven South African mining houses in 1919 promising to refine their gold after the mining houses agreed to sell all of their gold to the Rothschild’s.  Five members agreed on a price and London fixing was established.

The trading of physical gold and gold derivatives on several exchanges in today’s market determines daily gold prices with the traditional gold fix still serving as the benchmark price.  The fix is set twice daily at 10am and 3pm.  In 1968, N.M Rothschild introduced the latter fix to coincide with the opening of the U.S. markets now considered to be the more important of the two.  Today, none of the original member’s banks remain and Rothschild resigned its chairmanship in 2004.  The current members are the Bank of Nova Scotia-Scotia Mocatta, Barclays Bank, Deutsche Bank, HSBC Bank US and Societe Generale with a chairmanship that rotates annually.  The fix reports the gold price per troy ounce in three currencies: US dollars, Sterling and Euros.

GOLD DEMANDS, SUPPLY & GOLD’s VARIED CONTRIBUTIONS

Gold mining companies operate on every continent on the globe working diligently to supply us with more gold.  Still, in all of the history of gold mining there is only 165,000 metric tonnes of gold in existence above ground.  You could create a cube, 20 meters x 20 meters, placing every square inch of gold next to each other, and that would represent all of the gold we currently possess on this planet.  Gold is very rare.

60% to 70% of today’s gold becomes jewelry, sold mostly in India, China, East Asia and in the Middle East where gold is a culturally powerful and revered.  Jewelry creates one demand; however, financial investments, central bank reserves, and the technology sector are also very significant.

Gold powers our internet and is important in space exploration and nano-particle technology.  It is the bonding wire at the heart of our iPhones and has so many extraordinary physical properties that it will be essential in a wide variety of future scientific applications.  Gold should be the backbone of any financial portfolio.

Did You Know?

  • One ounce of gold can be drawn into a wire 50 miles long
  • Gold is 19.3 times heavier than water and one of the heaviest metals known
  • The world’s gold supply increases by only 2,000 tons per year
  • All the mined gold in the world could fit into a cube measuring 65.5 feet
  • Gold will not rust, oxidize, tarnish, corrode, decay or deteriorate
  • The most popular gold bullion coin is the U.S. Gold Eagle (1985)
  • Gold topped $1,000 an ounce in March 13, 2008 amid recession fears in the U.S.
  • Gold’s atomic number is 79, meaning there are 79 protons in the nucleus of every atom of gold
  • Au is the chemical symbol for gold and its atomic weight is 196.67
  • There are 4,600 tonnes of gold in Fort Knox and 6,200 gold bars in the Federal Reserve
  • It is much rarer to find a one ounce gold nugget than to find a 5 karat diamond