Gold
fever returns CBC
News - Last Updated: Monday, October 19, 2009 | 8:01 AM ET
Many
people can still recall the long lineups at bullion dealers
and coin sellers in late 1979 and early 1980 as hopeful speculators
jumped on the gold bandwagon. Gold reached a record $850 US
an ounce back then as interest rates and inflation headed
well into double-digit territory.
But the excitement didn't take long to fade,
and bullion began a long slide to just $255 an ounce by early
2001. (All prices in U.S. dollars.) Gold's next major ride
up began in 2005, when it broke above the $500 level for the
first time since the early 1980s. From there, it was a steady
climb higher.
Gold futures hit $600 an ounce in April 2006,
$700 in May 2006 and $800 in October 2007. In January 2008,
gold finally traded above the record $850 level of 28 years
earlier. By March 2008, it reached and surpassed $1,000 an
ounce before retreating back below $800 later in the year.
But
the financial crisis and the slumping U.S. dollar soon had
bullion re-testing those record highs. By October 2009, gold
was trading at $1,075 an ounce.
Of course, that's still a long way from a
real record high, once inflation is taken into account (gold
would need to trade at $2,300 an ounce to match the buying
power of $850 of 1980). But a quadrupling of gold prices in
eight years and a doubling in four has certainly opened a
lot of eyes.
A
brief history of gold
Gold has been a desirable and valued commodity since before
recorded history. Archaeologists have discovered stashes of
gold jewelry dating back to 3000 B.C. in what is now southern
Iraq. Ancient Egyptians buried their rulers
with elaborate gold adornments, such as the gold mask, sarcophagus
and amulets that were fashioned for Egypt's boy ruler, King
Tut, in the 14th century B.C.
Alchemy was a popular preoccupation for many
centuries, as the most learned members of European, Chinese
and Arab societies searched for a way of turning base metals
into gold. They didn't succeed, of course. But alchemists
did discover many new elements in the process and laid the
foundations of modern chemistry.
The search for gold launched European explorers
on some of the most ambitious and ruthless overseas expeditions.
Spanish Conquistadors plundered and ravaged the Incan and
Aztec societies of the New World under orders from King Ferdinand
to "get gold."
Gold has been used as money for at least 3,500
years. The shekel began circulating in the Middle East in
1500 BC. The Chinese and the Romans followed with gold coins
of their own. The ducat appeared in Venice in the latter part
of the 13th century and soon became the most popular gold
coin in the world. Britain had its gold florins.
So
powerful was gold's lure that it often figured in myth. In
ancient Greek legend, Jason had to collect the wool of a golden
ram – the Golden Fleece — before he could claim his inheritance.
Then there was King Midas, who was granted his wish that everything
he touched would turn to gold — the Midas Touch.
In the 19th century, gold rushes opened up
various parts of the world to sudden development — including
Alaska, the Yukon, Nevada, California, South Africa and Australia.
In the 1840s, British gold sovereigns and
$10 gold eagle U.S. coins were both considered legal tender
in Canada. The first Canadian bank notes were partly backed
by gold.
From 1854 until the outbreak of the First
World War, Canadian currency was on the gold standard, meaning
that the value of the Canadian dollar was fixed in terms of
gold. It was a standard that Canada and much of the industrialized
world used for a good part of the 20th century — finally abandoning
it altogether by 1971.
Gold, which had been pegged at $35 and later
$42.22 an ounce, began to soar once ownership restrictions
and other controls were removed.
Currently, most of the 2,500 tonnes of gold
produced each year is used for jewelry. But as much as 20
per cent finds its way into such industrial applications as
telecommunications and computers, where the metal's high electrical
conductivity is prized.
Why are gold prices so volatile?
There are a million golden theories to address
the rise and fall in the market price of the precious metal.
Most relate to supply and demand. When prices rise, some analysts
point to heavy buying from central banks or hedge fund managers
or investors wanting to diversify their investments away from
perceived weak currencies.
The growing middle classes in India and China
have been mentioned as one reason why demand for gold has
been growing; jewelry is, after all, the biggest use for gold.
Traditionally, weakness in the exchange value
of the U.S. dollar has also been bullish for gold prices,
and the greenback weakened dramatically against a wide basket
of currencies from 2007 through 2009. It reached an all-time
low against the euro and a 31-year low against the loonie.
When prices fall dramatically, analysts look
for signs that central banks are selling off their gold reserves.
Many countries have been doing that. The Bank of Canada, for
example, has sold most of its gold reserves and held just
$114 million worth as of October 2009. But recently, the wider
demand for gold has offset central bank selling as the weak
U.S. currency had investors rushing into gold.
Gold has long been a traditional hedge against
inflation, and demand for gold tends to pick up when inflation
does.
And some price movements may simply be on
account of speculation from short-term momentum traders who
notice big price swings in either direction and want to join
what they see as a bandwagon.
Investors are left wondering whether the next
climb or plunge is just around the corner, followed by years
of stagnant returns.
Should I buy gold, and if so, how
can I get some?
Financial planners generally advise their
clients who want a stake in gold to keep their precious-metal
holdings to a small part of their overall portfolio – at most
five or 10 per cent.
There are many ways to acquire gold. You can
buy gold coins, gold wafers or bars, or gold certificates.
Gold coins: A number of
countries mint gold coins. Britain has been producing sovereigns
for centuries. Austria, China, the U.S. and Mexico also
produce gold coins. South Africa has produced its Krugerrand
coins since 1967. Canada joined the gold rush in 1979 with
its Maple Leaf gold coin. At 99.99 per cent gold composition,
it's the purest gold coin in the world. It's available in
six denominations from 1/20th of an ounce up to one ounce.
There is a small premium charged on the gold value of the
coins. Maple Leaf coins are available from the Royal Canadian
Mint, some coin dealers and some banks. Be aware that some
Canadian gold coins are aimed at collectors and sell for
considerably more than their gold value. So, if you just
want a coin for the gold content alone, buy Gold Maple Leaf
coins. No GST is charged on gold coins if they are refined
to a purity of at least 99.50 per cent. But some provinces
charge sales tax on gold coin sales.
Gold wafers and bars:
There's nothing quite like the sensation of tossing around
a 400-ounce gold bar, much as James Bond did to lure Goldfinger
into his trap in the 1964 movie. Now, you can buy a gold
bar, too. ScotiaMocatta, the precious metals division of
the Bank of Nova Scotia, has big vaults loaded with gold
bars. It can sell you bars and wafers ranging from one ounce
to 400 ounces for a small premium over the spot gold price.
Most financial institutions will also rent safety deposit
boxes to store your gold haul.
Gold certificates: You
can also own gold in certificate form. Any Canadian branch
of Scotiabank can issue paper certificates that are backed
by the bank's assets. There are no fabrication, shipping
or insurance costs and no sales tax to pay. They can be
sold easily or exchanged for physical bullion. They are
made out of paper, however. Goldfinger would not be impressed.
You can also invest in companies that mine
gold. There are dozens of gold companies listed on the Toronto
Stock Exchange. Some of the biggest Canadian companies are
Barrick Gold, Kinross and Goldcorp. International gold mining
giants include Newmont Mining, AngloGold Ashanti and Gold
Fields Ltd.
Investing in gold miners can provide more
leverage than simply investing in the precious metal itself.
What does that mean? Let's assume that it costs a gold producer
$500 to produce an ounce of gold, and gold is priced at $1,000
an ounce. If bullion prices rise by $100 an ounce, that represents
a 10 per cent price increase. But for a gold miner, that same
$100-an-ounce increase translates into a 20 per cent profit
increase as the profit per ounce jumps from $500 to $600.
In Canada, dozens of precious metal mutual
funds can give investors a stake in a variety of companies
that mine gold and other precious metals.
There are also several exchange-traded funds
(ETFs) that track either gold mining stocks or the actual
price of bullion. The iShares CDN Gold Sector Index Fund (TSX
symbol: XGD) invests in 28 Canadian and foreign gold companies.
It trades like a stock on the TSX and has a low annual management
expense fee (0.55 per cent), making it an attractive alternative
to mutual funds.
Two other ETFs track the price of gold directly.
Units of the iShares COMEX Gold Trust (TSX symbol: IGT, AMEX
symbol: IAU) and SPDR Gold Shares (NYSE symbol: GLD) track
the price of gold directly. Each unit's price represents the
cost of 1/10th of an ounce of gold.