Category: Investment Gold

It is difficult for a person or company whose work is related to investment precious metals not to receive a professional or personal query about the possible sale value that “grandma’s jewelry” may have. Some pieces that the interested party has treasured with care for decades with the aim of being able to get a return on them.

“How much do you think you can give me for this bracelet and these earrings that belonged to my great-grandmother?”

Surely anyone who has some relationship with the gold market has heard this question on more than one occasion, even though their activity, like ours, has more to do with investment gold than with pawn shops, popularly known as ‘I buy gold’ .

Usually, the answer that the professionals in the field, the aforementioned ‘I buy gold’, usually give to the potential client, they are not usually satisfied. “It’s that they are made of gold” , he will answer indignantly. “Yes, but 9 carats; that is hardly worth anything” , the potential buyer will specify.

That is precisely the key to the matter: the carats. In them lies the difference between valuable investment gold and not so valuable gold used in jewelry.

Jewelry, the world’s largest consumer of gold

According to data from the Gold Demand Trends 2019 report , from the World Gold Council , the demand for gold jewelry was 2,107 tons in 2019, 6% less than the 2,240.2 tons in 2018.

The jewelry sector is, together with the investment sector, the one that consumes the largest amount of gold extracted from the mines. Although its percentage has decreased in recent decades, due to the strength of sectors such as technology, the jewelry sector still accounts for more than 50% of the total demand for gold .

By region, China and India, the two largest global consumers of gold, are also those who demand the most metal for the manufacture of jewelry

“Investment” jewelry

Investment gold has characteristics of purity and shape that are defined, in the case of the European Union, by tax regulations, which establish that only bars and coins that meet certain conditions will be considered as such and, therefore, will be exempt from value added tax .

But the world does not end in the European Union, nor in Western countries. In Asia, gold has a special relevance. And in countries like India or China, jewelry is also considered, in a certain way, as investment gold. In India , for example, gold jewelry is the patrimony of women who marry. Hence, in the weddings that are celebrated in this country, the brides carry a large amount of gold on them.

In addition, in the rural areas of the country, which are poorly banked and dependent on agriculture, the inhabitants allocate the surplus of the crops, in good years, to acquire pieces of gold, usually jewelry, which constitute their insurance against any accident or medical need.

Hence, one of the factors that influences the price of gold in the country is the level of rainfall that is recorded in the monsoon season. The higher it is, the more abundant the harvests will be and, therefore, the higher the sales expectations of the jewelery merchants.

The same thing happens in China : in celebrations like the New Year, it is traditional to give jewelry and pieces of gold, a symbol that attracts good luck.

If this is the case in these countries, why is it that the Western world does not usually invest in jewelry?

The explanation is in the carats . These are a unit of measurement for the purity of metals (not to be confused with the carats of precious stones, which are a unit of weight).

Gold is one of the most ductile and malleable metals that exist. This means that its low hardness allows it to take multiple forms, and be stretched into a thread thinner than a human hair, or crushed into a sheet of microns thick.

This quality, which has allowed it to be easily worked by artisans for many centuries, is also one of its weaknesses. Therefore, to be used in jewelry, gold has to be alloyed with other metals, which give it greater hardness and resistance to wear.

What does this mean?

That the jewels, especially those that were made years ago, usually have a very low caratage (18, at most), so the amount of gold they contain is lower than the client imagines.

To this we must add that the value of the pieces of jewelry lies not only in the amount of precious metal they contain, but also in other variables such as design, the difficulty of craftsmanship, etc.

In short, that a jewel that cost a fortune at the time and that the heir hoards with the hope of getting a good return in times of lean times, ends up being priced very low , because it has less gold than was supposed.…

ETFs (acronym for Exchange -Traded Funds , listed investment funds), an investment product introduced a few years ago, which allows investor exposure to gold, but without the need to acquire the metal.

A gold ETF is an exchange-traded fund whose price is determined by the evolution of the gold price , just as there are other ETFs whose prices are linked to the evolution of certain stock market indices.

In Europe, differences in legislation with respect to the United States determines that these products are called ETC (Exchange-Traded Commodities , something like listed raw materials).

The volume of gold that these funds had in the month of September was 2,855 tons , a figure that represents the historical maximum, above the 2,841 tons of December 2012 .

It is important to clarify that investing in these gold ETFs, through the purchase of a share, does not imply ownership of this gold , but only a right over it: the investor can request the delivery of the physical gold that corresponds to him , in proportion to its participation, but it is the fund that decides whether to deliver it.

Most likely this is not the case and the applicant will be returned the money equivalent to that share in gold, since the participants in an ETF do not have the gold assigned (that is, reserved in their name, with the numbers of the corresponding ingots).

In general, these funds have an insufficient amount of physical gold to support all the shares sold , just as the banks do not have sufficient funds on hand to return all the deposits to the clients if they agree to claim them from the time.

For this reason, it is often referred to as the “bubble” of gold ETFs.

They are another indirect way of investing in gold without having to purchase physical gold. These are funds that invest capital in companies engaged in the gold business . In this way, its participants can gain exposure to the metal without having to acquire it or buy shares in a mining company.

The profitability of these funds obviously depends on the evolution of the price of gold, which affects all the companies that work with this metal. However, it should be noted that investing in this type of fund is not the same as investing in gold since, as with ETFs, it does not grant ownership titles to gold .

In addition, the fact that they are investment funds cannot be ignored, with high profitability but also a high level of risk , at least much higher than that involved in a simple investment in physical gold.

At a more advanced investor level there are other investment products referenced to gold such as certificates and warrants.

The certificates are listed investment products that replicate the evolution of gold and that do not have an expiration date and the liquidity that allows their immediate placing on the market.

However, investors in gold certificates have to bear an annual cost, as a management fee, which usually amounts to 1.75% of the value of the certificate.

As for warrants, they are listed products that grant the theoretical right to buy or sell an asset , in this case gold, at a fixed price and up to a certain date.

In general, they function as purchase rights, known as calls, or sales rights, put, on gold titles, which are established at a price, called strike, and at a future expiration date, which cannot be less than three months. Its operation is similar to that of a bet on the future evolution of the asset .

This type of product carries a high level of risk, so they are only suitable for very experienced investors with a high tolerance for volatility and the ability to take losses. That is, the complete opposite of physical gold, whose objective is the protection of heritage.

Gold futures are contracts to negotiate with the metal under established conditions of quantities and prices, which are set more than three months in advance . Hence the name futures.

The transaction, that is, the exchange of gold for money, takes place on the so-called settlement date. During the time that the postponement lasts, traders take the opportunity to speculate and carry out operations of greater volume, with greater risks, to obtain greater benefits, with the margin of maneuver that allows them the fact of having at least three months to date in which the operation is executed.

To guarantee that the operation is carried out and neither party backs out due to a rise or fall in the price of gold, there is a guarantee called margin , which is a deposit made in an independent financial institution and whose value It is usually between 2 and 20% of the value of the operation .

To operate with this type of product, it is necessary to have specialized and qualified agents to operate in futures markets, so there is a significant extra cost for investors. In recent years, the development of technologies such as the blockchain has allowed the appearance of new formulas to invest in gold in an easy and accessible way.

Broadly speaking, the companies that have put these investment mechanisms on the market allow clients to invest in precious metal from very small amounts and have an account with their balance in gold , which they can manage from their mobile phone, buying, selling or exchanging grams of gold for money or even for other products.

It would be a technological evolution of the concept of using gold as money, with the security that blockchain technology allows.

These new investment formulas are becoming very popular in countries closely linked to gold, such as India. In this country there are several companies competing for a market of millions of potential investors, who regularly acquire various amounts of gold as an investment.

However, this novel formula also suffers from the same problems as other versions of paper gold: investors do not get to get their hands on the gold and, in the event of an emergency situation, they cannot dispose of the metal to meet their needs, since everything is based on digital transactions.

Finally, investing in shares of mining companies is a form of indirect investment in gold . Investors benefit from good times in the metal market or the discovery of new deposits.

However, they are also exposed to external circumstances that may affect the price of mining companies, such as accidents, labor disputes, confrontation with governments over the terms of concessions, tightening of environmental regulations.

In short, all these investment options use gold as a more or less close underlying, but do not give the investor ownership of the physical metal, which is the best way to enjoy its main attributes, such as its ability to maintain value, preserve purchasing power or serve as a refuge in times of crisis .

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