In this paper I will provide an overview of why gold is a good investment choice. I will give an analysis of gold’s current and historical prices, why an investor should invest in gold, and the wide range of options that are available to an investor that chooses to invest in gold.
Gold is recognized worldwide as a true form of currency. It has a universal store of value; it can function as a hedge against inflation, protection against the declining value of the dollar and is a good option to sustain wealth in the declining financial market. Gold is a currency that option and is desired by many people, easy dividable, scarce, and durable. Gold had an intrinsic value before it became money and that is the foundation of its worth.
Gold has increased in price over the last decade by 500%. In the increase in price is attributed to the drop in the value of the dollar and the expectation that inflation will rise to above average levels. Gold was valued at $900 an ounce in April 2008, $1,888.70 in August 2011 and as of July 25, 2012 it was valued at $1,608 an ounce. Through March 2012 the spot price of gold returned of 18.5 percent, while the S&P 500 has had a return of only 4.11 percent. The chart below shows the increase in gold prices for the last ten years and gold’s performance price for the last 30 days, six months, one year, and the last five years.
10 year gold price history in US Dollars per ounce. http://goldprice.org/gold-price-history.html http://goldprice.org/gold-price-history-html
History has showed that during the 1970’s when inflation was major issue the price of gold rose. Inflation from 1971 to 1974 rose from 2 percent to 10 percent and the price of gold increased from $40 to $180 per ounce. Later in the years from 1977 to 1980 when the country was reaching hyperinflation, gold increased in price from $130 to $675 per ounce. Over the long term history has showed that when the value of the dollar falls, the price of gold in increases. http://web.ebscohost.com.proxy.ohiolink.edu:9099/ehost/detail Today, there are several options available to investors that want to participate in gold investing. There are variety ways to invest or buy gold. The options include coins and bars; Exchange Traded Funds, (ETFs), futures and options, warrants, gold accounts, gold accumulation plans (GAP), gold mining stocks, gold certificates, gold orientated funds, and structured products. Some of the hidden costs associated with investing in gold are storage and handling fees and the liquidity when sold. Sometimes it is not always clear between the distinction of physical gold and other investments; especially it has been possible to invest in bullion without taking physical delivery.
There are different reasons for investing in gold. Some investors may want to increase their value of assets for the long term, have a high growth for early retirement, or to pay for tuition. Whatever the reason, the investor needs to know their investing goals before they invest in gold so that the investments can work for them and not against them.
If an investor is considering gold as an investment option, they need to consider which option will best meet their needs. The following questions are designed to help an investor decide which gold investment may be the best for their portfolio. Answers to the six questions listed below from gold.org website will help an investor know what options is the best choice for them. http://www.gold.org/investment/why_how_and_where/how_to_invest/
• Why did you decide to buy gold?
• Do you want a real asset that is physically available at all times or do you simply want exposure to the gold price?
• Will you want the gold delivered to you or would you prefer it to be stored in a vault?
• Do you have information about all the costs that may be involved? These include taxes, commissions, premiums, storage and insurance?
• Is the counterpart (i.e. the person or company from or through whom you will be making the purchase) reliable and trustworthy?
• How does gold fit in with your other investments?
Why invest in gold?
Historically, investing in gold has been an asset in a long term investment portfolio during times of financial uncertainty. For today’s investor gold can offer stability offering little or no risk. In the following paragraphs I have listed a number of reasons that make gold a wise investment.
Portfolio diversification “Most investment portfolios primarily hold traditional financial assets such as stocks and bonds. Diversifying your portfolio can offer added protection against fluctuations in the value of any single asset or group of assets. Risk factors that may affect the gold price are quite different in nature from those that affect other assets. Statistically, portfolios containing gold are generally more robust and less volatile than those that do not.” http://www.gold.org/investment/why_how_and_where/why_invest/

Hedge against inflation “Market cycles come and go, but over the long term, gold retains its purchasing power. Gold’s value, in terms of the real goods and services that it can buy, has remained remarkably stable for centuries. In contrast, the purchasing power of many currencies has generally declined, due for the most part to the rising price of goods and services. Hence investors often rely on gold to counter the effects of inflation and currency fluctuations.” http://www.gold.org/investment/why_how_and_where/why_invest/
Currency Hedge “Gold is employed as a hedge against fluctuations in currencies, particularly the US dollar. If the world’s main trading currency appreciates, the dollar gold price generally falls. On the other hand, a fall in the dollar relative to the other main currencies produces a rise in the gold price. For this reason, gold has consistently proved to be one of the most effective assets in protecting against dollar weakness.” http://www.gold.org/investment/why_how_and_where/why_invest/
Risk Management “Gold is significantly less volatile than most commodities and many equity indices. It tends to behave more like a currency. Assets with low volatility will help to reduce overall risk in your portfolio, adding a beneficial effect on expected returns. Gold also helps to manage risk more effectively by protecting against infrequent or unlikely but consequential negative events, often referred to as “tail risks”. http://www.gold.org/investment/why_how_and_where/why_invest/
Demand and supply
“The price of gold tracks the shifting balance of supply and demand. Long lead times in gold mining mean production of gold is relatively inelastic, regardless of increases in demand. That’s why the rally in the gold price since 2001 has not engendered a meaningful increase in gold production levels. Demand for gold has shown sustained growth recently, due at least in part to rising income levels in key markets. These supply and demand factors have laid foundations for gold’s most positive outlook in over a quarter of a century.” http://www.gold.org/investment/why_how_and_where/why_invest/
Ways to Buy Gold
Coins and rounds
Coins and Rounds are one of the most common investing methods of gold. Coins are legal tender however rounds are not. They are both physically the same. Usually gold coins have a collectors value associated with them while rounds are only valued as gold itself. Investors should buy gold as close to the spot price as possible. Gold coins are a good way to do this. The best choices for buying true gold coins close to spot are The American Gold Eagle, American Gold Buffalo, South African Krugerrand, and the Canadian Maple Leaf. Coins can range in size from 1/20 ounce to 1000 grams, the most common weights are in troy ounces and are in 1/20, 1/10, ¼, ½ and 1 ounce. The advantage to gold coins and rounds are that they are physical and they are easily stored in a safe of safe deposit box. They can also be bartered and easily sold for cash. Gold coins and rounds are sold in fractional ounces, so they are a good choice for an investor with a smaller budget.
Gold Bars
Gold bars can be split into large and small categories. Small gold bars can be bought in grams, ounces or fractions of ounces. A small bar is generalized as weighing 1000g or less. They are similar to gold rounds, in that they are not legal tender but are small and ideal for barter, are liquid, and have a small premium over spot. Large bars are minted in standard sizes of 100oz and 400oz and are used for “Good Delivery”, on professional gold exchanges. Good Delivery means that the mint that created the bar in a known, monitored agent in the market. The bars can be bought and sold without verifying their authenticity. One disadvantage of the large bars are that there are fewer buyers available and have less convenience compared to buying non-physical ownership. The large bars provide the best prices if they are bought either personally or though specialized vaults. There are specialized bullion vaults that allow investors to buy stock at lower weights and do most of their selling on large bullion markets with 400oz Good Delivery bars. The advantage to this is it appeals to an investor with a smaller budget and has smaller premiums; however you don’t physically the gold. “According to industry specialists Gold Bars Worldwide, there are 110 accredited bar manufactures and brands in 27 countries. Between them they produce a total of more than 400 types of standard gold bars, all of which normally contain a minimum of 99.5% fine gold. http://gold.org/investment/why_how_and_where/how_to_invest/
Online Channels
For an investor that wants immediate access and convenience to gold investments, there are online channels. These channels offer a range of options in trading, delivery or storage of bar and coins, and trading. It provides investors with cost effective, secure, and convenient way to buy and own physical gold. http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Backed Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs)
Gold Backed Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are traded on a variety of stock exchanges. They are financially regulated products that are backed by gold bullion held in secure vaults. ETFs are a secure and cost efficient way to own gold without taking physical delivery. These are stock-like securities and trust managed. Returns in this type of investment are reduced by built-in management and storage cost, although they are highly liquid. ETFs are a good investment, if the investor does want the inconvenience of delivery and storage. This is not a good investment if the owner wants to have the gold in their physical possession. “The largest of the physical gold bullion backed ETFs is SPDR Gold Shares (GLD). Launched in 2004, GLD was the first such product to be made available in the US. Its primary listing is on the NYSE Area. It was subsequently cross-listed on the Singapore Stock Exchange, the Hong Kong Stock Exchange, Bolsa Mexicana de Valores and the Tokyo Stock Exchange. http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Futures
Gold futures can have significant trading profits, or it can produce significant trading losses in the event of adverse movement in the price. “Futures are binding commitments to make or take delivery of a specified quantity and purity of gold, on a prescribed date, at an agreed price. The initial margin-or cash deposit paid to the broker- is only a fraction of the price of the gold underlying the contract.” “The key determining factor in futures prices is the market’s perception of what the carrying costs ought to be at a given time. These include the interest cost of borrowing gold plus insurance and storage charges. The gold futures price is usually higher than the gold spot price. “Traders deal in futures contracts on regulated commodity exchanges. The largest of these is the New York Mercantile Exchange Comex Division (recently rebranded CME Globex, after a merger between Chicago Mercantile Exchange and NYMEX), the Chicago Board of Trade (part of CME) and the Tokyo Commodity Exchange. Gold futures also feature on exchanges in India and Dubai.” http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Options
Gold options give the holder the right, but not the obligation to buy (call option) or sell (put option) a specified amount of gold at a predetermined price by an agreed date. The cost depends on the current spot price of gold, interest rates, anticipated or implied volatility, time to expiry, and the pre-agreed or strike price. The strike price will be a less expensive call option but a more expensive put option. http://gold.org/investment/why_how_and_where/how_to_invest/
Warrants
Warrants give the buyer the right to buy gold at a specific price on a specific day in the future. These are offered by leading investment banks and are subject to a premium. Warrants as well as futures are warrants that are leverage to the price of the underlying asset. http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Accounts
These accounts are allocated or unallocated. Allocated gold certificates are simply certificates of ownership. The gold is stored in a vault owned and managed by a recognized bullion dealer or depository. The owner or depository provides a certificate that gives a reference to the bar or bars that are allocated to you. In order to buy the certificates there is a premium over spot; however the investor does not need to worry about transport or storage. The owner is responsible for custodian, storage, and insurance fees. In unallocated accounts the company owes you a liability because it owes the investor the gold. In this case there is no specific bar with your ownership; instead you are paying the company for the gold now and delivery later. The advantages of unallocated accounts are that the owner does not have to pay storage and insurance fees. Unallocated gold certificates can very risky if the company goes insolvent you could run the risk of losing your investment. http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Pool Accounts
This is alternative option for investors that wish to purchase less than 1000 ounces of gold. These accounts offer a defined unsegmented interest in a gold accounts pool of gold. As little as one ounce can be invested in one of these accounts. http://gold.org/investment/why_how_and_where/how_to_invest/
Electronic Currencies
This is a simple, cost effective way to buy and sell gold using it as money. These are electronic currencies available linked to gold bullion in allocated storage. Any amount can be purchased and used to send payments worldwide. http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Accumulation Plans (GAPs)
These plans are similar to a savings plan, a fixed amount of money is put aside every month and then that sum buys gold every trading day in that month. The sums can be small but are not subject to premiums. Investors can receive their gold in whatever form they choose, whether it be jewelry, bars or coins, or it can sold for cash within the term of the contract or when the account is closed. http://gold.org/investment/why_how_and_where/how_to_invest/

Gold Mining Stocks
“The gold mining sector is large and liquid. Over 300 mining companies are listed and publicly traded on various US stock exchanges alone. Globally the sector is capitalized at over US$220 billion. Capitalizations range from between US$50-US$300 million to the large cap gold mining stocks of over US$10 billion.” http://gold.org/investment/why_how_and_where/how_to_invest/ Gold mining stocks provide a way to gain exposure to gold and the opportunity for outperformance. This method is an alternative to investing in other forms of gold. “These stocks do not simply track the price of gold in the same way that physical bullion, gold ETFs or gold futures do.” Factors that influence prices of stock include gold reserves, ore grades, costs, margins, and profitability to name a few.
Gold Certificates
In the past gold certificates was a part of the gold standard. The US Treasury issued certificates from the civil war to 1933. The holder could exchange these certificates for an equal amount of gold; however these certificates are now out of circulation and are considered to be collectibles. At the present time, this option gives investors a method of holding gold without taking physical delivery. The issuing banks hold the metal on the client’s behalf and confirm the ownership. “The Perth Mint runs a certificate program that is guaranteed by the government of Western Australia land is distributed in a number of countries. http://gold.org/investment/why_how_and_where/how_to_invest/
Gold Orientated Funds
Gold orientated funds are funds that include mutual funds, open-ended investment companies, closed-end funds, unit trusts, and any similar structures. These funds specialize in the shares of mining companies and operate in various countries. These funds are regulated and usually differ in structure. Some invest in shares of gold mining companies while others may invest in futures and mining equities. These equities are more volatile than gold as well as having the same risk factors as other equities found in the stock market. http://gold.org/investment/why_how_and_where/how_to_invest/

Structured Products
“Structured products usually hold a high minimum investment. For this reason, institutional investors dominate the market, along with gold market professionals in the case of forwards.” http://gold.org/investment/why_how_and_where/how_to_invest/
Forwards
“Forward contracts are similar to futures. They are agreements to exchange an underlying asset - in this case, gold - at an agreed price, at a future date. They can be used to either manage risk or for speculative purposes.
Forwards and options trading on the over-the-counter (OTC) gold market differ significantly from futures or options that trade on one of the exchanges. Some of the key differences include:
• Counterparties will negotiate a forward contract (or OTC option) directly. The instrument is tailor-made, whereas futures contracts are standardized agreements that trade on an exchange.
• Although forward contracts offer the greater flexibility of a private agreement, they still pose a level of counterparty risk. Futures contracts carry the guarantee of the exchange on which they trade and are therefore risk free.
• The owner of a futures contract can sell to third parties at any point before maturity, making these instruments more liquid than forward contracts (whose obligations cannot be transferred).” http://gold.org/investment/why_how_and_where/how_to_invest/
Gold linked bonds and structured notes
These bonds are available from the largest bullion dealers and investment banks. They provide investors with a combination of exposure to gold price fluctuations, a yield, and principal protection. These notes allocate the sum invested to purchasing put/call options. The balance goes into traditional fixed income products and generates a yield. They offer protection and a degree of fluctuations. http://gold.org/investment/why_how_and_where/how_to_invest/
For a long term investor they should use gold as means of protecting wealth. The price of gold will go up during times of inflation but the worth and value will stay the same. When prices rise, the investor should be buying less and when prices fall they should be buying more. In this particular article http://www.bandholz.com/2011/10/fundamental-investment-strategy-to-investing.com the author recommends keeping about five to ten percent of your portfolio in gold and suggests that gold investments should not be used as a way to get rich, but to preserve wealth and grow it at or above inflation. Investors are turning to gold as a safe haven against the declining value of the dollar and the uncertainty in the financial markets. Reasons to invest in gold are to the declining value of the dollar, the possibility of a disaster in the banking and financial system, protect against inflation, and protecting your wealth.
In an article titled “Gold Gets No Respect But It’s Beaten Everything Including Berkshire”, the author compares gold to other investment options and has found that gold outperforms other investment options such as stocks in the overall market and 10-year Treasury bonds. The facts in this article indicate that gold is a good investment for the long term, especially in today’s uncertain financial market.
Investors have lost more money in Groupon and Facebook stock than all of the gold funds assets. Groupon lost $15 billion in market capitalization from November 4 through July 26, while Facebook has dropped $34 million from May 18 through July 26 compared to gold that dropped $11 billion. http://www.forbes.com/sites/greatspeculations/2012/07/31/gold-gets-no-respect-but-its-beaten-everything-including-berkshire/
The author shows in the next chart that the Bank of America, and S&P 500 Index have been historically more volatile than gold. http://www.forbes.com/sites/greatspeculations/2012/07/31/gold-gets-no-respect-but-its-beaten-everything-including-berkshire/

In the illustration below, the author points out that Treasuries are usually treated as safe havens in the market, however with low yield investments, inflation causes investors to lose money on Treasuries. Through the middle of July 2012, 10-year Treasuries have fallen to less than 1.5 percent while inflation being at the rate of 1.7 percent, this leaves investors with a loss of .2 percent. http://www.forbes.com/sites/greatspeculations/2012/07/31/gold-gets-no-respect-but-its-beaten-everything-including-berkshire/

In conclusion, gold is clearly a good investment for the long term investor. Its historical performance has increased dramatically over the past ten years, with most of the increase occurring in the last five years. As I provided evidence of when there is a downturn in the economy gold outperforms other forms of investments. Using the wide range of gold investment options that I have outlined gold can provide diversification in an investor’s portfolio to guard against the financial uncertainty in the markets today along the declining value of the dollar.