TOPIC : GOLD Project scoop Project length: 12 pages Max! To be included in the paper: Overview of Gold as a commodity and its many origins! Why is gold such an attractive investment? What are the...

RUNNING HEAD: GOLD 1
Gold as an Investment
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Gold
Overview of Gold and its origin
Gold is considered as a soft metal which was discovered in early ages of civilization. It is
considered as one of the precious metals. Gold has always been an investment instrument whose
popularity is closely linked to economic and political instability. Gold as a tool and monetary
standard stayed at the basis of the monetary systems for a long time, organizational forms of this
integration in the system evolving over time. (An Asset for all times, 2011)
The value of these instruments is essentially linked to the spot price of gold as set on the
major commodity exchanges (London, Zurich, Chicago, Tokyo). The majority of the transactions
on these exchanges occur in U.S. dollars and it is probably fair to state that the gold price is
determined by investors who use dollars as their base currency. This also means that, at least
theoretically, the fate of the U.S. dollar on the foreign exchange market and the gold price are
closely linked. Any investor who manages his portfolio with a non-U.S. dollar base currency,
therefore, has to take into account this linkage between the dollar and the gold price.
Gold is widely considered to be an asset whose intrinsic value and purchasing power will
not be widely subjected to the fluctuations of inflation. It is widely respected as a store of value.
The origin of gold is presented in the core of Earth’s crust, it can be amalgamated with iron and
nickel. It is presented in the crust and mantle in a very low concentration. There are some of the
main places like South Africa which are considered to be the main extractor of gold. (Anderson
A J, 2012)
There are a number of ways in which it is possible to invest in gold. These include the
metal itself, coins, jewellery, shares in companies involved in exploration, mining and
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manufacture and other gold-related assets such as bonds, gold metal funds and gold derivatives,
futures and options. (Hayness, Ron)
Gold: an attractive investment
The primary reason to invest in gold is not to make money, however, but to have money,
in any and all circumstances. It has a long and impressive history as a safe haven during
economic disasters.
The other reason to invest in gold is that adding it to a diversified, periodically rebalanced
portfolio tends to reduce the volatility of the portfolio’s returns, without reducing the overall rate
of return.
Gold has value as portfolio insurance because it behaves differently than most assets: The
correlation between the price of gold and the prices of stocks, bonds, and other investments has
historically been very low.
Some of the other reasons to invest in gold are:
Diversification Benefit: Overall portfolio risk can be potentially reduced by adding
"Gold" to investor portfolio because "Gold" has a very low or negative correlation with other
asset classes. Hence it offers a maximum diversification benefit.
Inflation Hedge: It has been noticed that gold has consistently beaten the inflation rate
and helps to preserve purchasing power over the past .Gold has over many centuries , maintained
its value against inflation.
Low volatility asset. Gold is comparatively less volatile to other securities over a long
period of time. It has been noticed that investment in gold has contributed to stability in the
overall portfolio.
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Protection against currency weakness: Gold helps to protect value of money against
currency weakness especially against US dollar. Since gold is denominated internationally in US
dollars, US interest rates have a great impact on prices.
Hedge against event risk: Gold has always been tended to be the best against event risk.
If you decide to invest in gold, your next decision is what type of gold investment to
make. Investors have three choices: physical gold, the stocks of gold mining companies, and
exchange-traded funds (ETFs). (Baur, D.G. and Lucey, B.M., 2010)
Physical Gold: The best way to invest in physical gold is to buy gold coins. But there are
three types of coins, and only one is suitable for investment purposes.
Bullion coins are coins whose value is determined almost solely by their gold content. Their
price is equal to the value of their gold content plus a small premium, typically 5 to 8 percent.
These coins are the most popular, most liquid, most portable, and most convenient way to invest
in physical gold. (Mukherji B. & Nayak D, 2013)
The most popular are the U.S. Eagle, the Canadian Maple Leaf, the Austrian
Philharmonic, and the South African Krugerrand. In addition to the standard one troy ounce coin,
they are also manufactured in smaller denominations of one-half, one-quarter, and one-tenth
ounce. Because it costs roughly the same to manufacture a small coin as a large coin, the smaller
the coin, the larger the premium per ounce.
Numismatic coins are those whose value is based not only their gold content but on their
age, rarity, design, finish, and popularity as “collectibles.” Fluctuations in their price may be
only loosely tied to the gold price, and the resale market is limited. If you are willing to invest
the time to learn about rare coins, this can be a rewarding market. But it’s a market best left to
serious collectors, not investors.
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The third kind of gold coin is the commemorative coin, which is a hybrid of bullion and
numismatic coins. The initial price of these coins may be far above the value of their gold
content. But the resale value may be much lower, little more than the bullion value. For this
reason, these coins are best avoided by gold investors. (Pleven L, 2013)
Gold bars are another option. But they are larger (typically 10 ounces or more) and
therefore more expensive, less convenient, and less liquid than coins. There are fewer dealers
and, because bars are easier to counterfeit, when you resell them you may be required to provide
proof of gold content, including assaying (a chemical test to determine purity).
Time value of money and Fisher’s effect:
Considering from the perspective of finance and its return, we can say that Gold is
considered as one of the best investment for long term investment. With the investment in gold,
the investor is likely to have higher returns on their investment. With the present investment in
the Gold, the investor will likely to have higher returns on the future; the expected return on the
investment in gold is more than 120% over a long period of time.
Considering the fisher’s effect on the prices of gold, we can say that the inflation and the
prices of...