GOLD – king of metals

Gold is the 79th element in the periodic table. Its chemical symbol, AU, is derived from the name AURUM. The history of gold goes back thousands of years before the birth of Christ.

The precious metal, gold, has symbolised prosperity and value retention for more than 5,000 years. No one can resist the glitter and attraction of gold. In mythology, gold is believed to possess supernatural powers, which are transferred to its owner. From Tutankhamun, who ordered his tomb to be constructed using pure gold – to whole nations like the USA, where, in the 19th century, people became slaves to the Klondike gold rush.

Gold is a very soft and resistant metal, often mixed with other metals. This process is known as alloying. The proportion of gold in an alloy is stated in either carats or thousandths. Fine gold is pure 24 carat gold, which corresponds to 999.9 thousandths. Gold with higher purity is often used for investment. The unit of measurement for investment activities is the troy ounce. A troy ounce corresponds to 31.1035 g of fine gold. Gold rates in the media generally refer to the troy ounce.

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Supply and Demand

Gold is more popular and in demand than ever. Even though currencies are not bound to the precious metal any more, central banks with their gold reserves continue to play an immense role in pricing. Gold is not only important for investment purposes; it plays a significant role in the jewellery industry. In 2009, the largest mining countries for gold were China, Australia, USA and South Africa. In the last three years alone, the mining countries have mined around 12,000 tonnes of gold.

In 2009, there was a high demand for the metal. The demand came from the jewellery industry (52%), finance sector (37%) and processing industry (11%). Due to the global increase in price for the metal and turbulent share markets, it is likely that in there will be a consistently high demand for gold in the future. (Source: World Gold Council)

Gold as a means of payment and reserve fund

Previously, the value of money, such as the dollar, was backed with gold stored in the central bank, and only changed when the gold price did. Today, no currencies are pegged to gold. However, many central banks use the characteristic of gold as a safe haven and for diversification, and are again increasing their stockpiles. Around 30,190 tonnes of gold are stored in the vaults of national banks and currency institutions with an upward trend. While central banks tended to be net purchasers of the yellow metal in previous decades, increasing numbers of reports record a change in behaviour. According to estimates, central banks hold 20% of the metal. If, as recently announced, further addition to stockpiles occurs; it could have a considerable effect on gold prices. Even now, the USA holds around 70% of its reserves in gold, while the ECB holds approximately 25%. The international average for the proportion of gold in reserves is only 10%. There is potential in China’s approach. Although the highest-populated country in the world is number 6 in terms of gold holdings with 1054 tonnes, this only covers 1.6% of its massive currency reserves. (Source: World Gold Council)

How is the gold price determined?

The fair value for gold is created by supply and demand. The prices for precious metals are determined on global financial markets on a daily basis. In the past, this provided evidence of the negative correlation of shares and loans to raw materials. In times when share prices were strong, the prices for raw materials decreased. It is only during troubled times and turbulent share markets that investors find their way to gold. There are a number of arguments in favour of gold investment. Particularly in times of threatening inflation and an uncertain future, owning physical gold makes sense. Fluctuations in the economic cycle play a large role. In times of good economic cycles, the jewellery industry is the largest gold consumer, while private investors search for a safe haven in the yellow metal in times of crisis.

On the free market the gold price is determined on the London Bullion Market. The so-called gold fixing has taken place there for centuries. The most important trading locations for gold are London, Zurich, Hong Kong and New York. Of equal significance are the COMEX commodity exchange, the largest precious metal stock exchange in the world and the New York Mercantile Exchange (NYMEX).

Numerous factors affect the gold price:

  • The way central banks trade in gold
  • The current rate for US dollars (as gold is traded in USD)
  • Supply and demand
  • Global economic cycles
  • Political unrest
Today, the gold price is still viewed as a valuable crisis and inflation barometer.

Global gold reserves

According to the World Gold Council’s estimates, around 165,000 tonnes of gold have been mined throughout the history of mankind, of which 65 per cent was mined after 1950. (WGC). If one were to create a cube of the gold currently available, then the length of one side would only be 20 metres – or as formulated by the National Geographic in 2009 – the total quantity of gold would only fill two Olympic swimming pools. If shared amongst the current world population, it would amount to 24.3 g per head.

30,190 t (18.3%) of the total global gold reserves are held by central banks and other institutions such as the IWF or ECB. The US national bank is the world leader, with its 8,133.5 tonnes. Far behind, in second place is Germany with 3,406.8 tonnes. Furthermore, 79,000 tonnes (51%) have been made into jewellery, around 18,000 tonnes (12%) have been used in artistic objects, and around 25,000 tonnes (18%) are privately owned as bars or coins.

Gold as an investment

Increasing numbers of investors are turning away from so-called “paper gold” and turning to physical investments. In particular, after the collapse of the Lehman Brothers investment bank, the belief in real values has grown amongst investors.

In Germany, investors can choose between investing in bars or coins. The most well-known gold investment coins are the South African Krügerrand, the Australian nugget or the Canadian Maple Leaf. The American Eagle, the Viennese Philharmonic and the Chinese Panda are also popular investment coins. Gold bars are available from various mints such as Heraeus.

In Germany, the sale of gold bars and gold coins for investment purposes is not limited to refineries and banks. Additionally, there is no VAT on the material value of gold bars and gold coins (so-called investment gold), as tax is not applicable in accordance with an EU directive. VAT is only applicable to the moulding costs portion or the bank trade portion. You can find out more » here.

Did you know that...

  • The word “gold” likely originated from the Indo-Germanic word “ghel”. It means as much as bright, shimmering, but also yellow and shiny.
  • Just one gramme of gold is sufficient to draw out a wire of 150m in length.
  • Gold is corrosion-free – it never rusts.
  • One ounce of gold is the equivalent to 10m2 in paper thickness.
  • A cube of gold with a length, width and height of each just 37.3cm weighs a tonne
  • A King by the name of “Croesus” was the “founder” of using gold coins as a payment method. He lived in Asia Minor in the year 650BC
  • The biggest storage place for gold in the world will not be found at Fort Knox, but rather under the streets of Manhattan. The address: 33 Liberty Street, NY. Around a third of the world’s gold reserves lie in a vault in the basement of the US Federal Reserve Bank.
  • The SPDR gold shares leads as the world’s largest ETF with physical gold holdings currently at 1,236.89 tonnes (as at 25/05/10), and thus is ranked 6th behind France and ahead of China when compared to central banks and monetary institutions.
  • The ratio of Dow points to gold (Dow/Gold ratio) shows how much gold one would need in order to buy a share in the Dow Jones Indexes. This ratio is a good indicator for whether a recession should be expected. In early 2009 this ratio was as deep as during the Great Depression of 1930.
  • Driven by fears of a recession, in March 2008 a troy ounce of gold reached the magical marker of USD 1000 for the first time in history.
  • Despite the current record prices it is still far from the levels of 850 US dollars/ounce in 1980. Adjusted for inflation, that would correspond to a current price of 2,300 US dollars/ounce. (Source: www.guardian.co.uk)
  • Nearly all the rocks and soils in the world contain gold traces. However, the content is so low that this is neither visible nor extractable. (Source: www.guardian.co.uk)
  • Gold is listed under E175 as a safe food additive in the EU. (Source: www.guardian.co.uk)
  • Gold has always been recycled. Therefore, today’s gold jewellery probably contains remnants of gold worn by the ancient Romans or Incas.(Source: www.guardian.co.uk)
  • 250 tonnes of rocks need to be mined in order to produce an ounce of gold. (Source: www.guardian.co.uk)
  • The largest nugget in the world was named “Welcome Stranger” and was found by John Deason and Richard Oates in Australia in 1869. The nugget weighed 2,248 troy ounces (69.92 kg). It was found a mere 5 cm below the surface.
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