5 Risks of Gold
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5 Risks of Gold



Risks of gold can be grouped into 1. risks arising from the physical ownership of gold (gold coins and bars), 2. risks at the gold exchange, 3. the volatility of gold, 4. political risks and 5. gold ...

Risks of gold can be grouped into 1. risks arising from the physical ownership of gold (gold coins and bars), 2. risks at the gold exchange, 3. the volatility of gold, 4. political risks and 5. gold scams ...



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5 Risks of Gold Presentation Transcript

  • 1. 5 Risks of Gold
  • 2. 5 Gold Risks
    Physical Risks of Gold Ownership
    Gold Exchange Risks
    Volatility of Gold
    Political Risks
  • 3. 1. Physical Risks
    Buying gold bars and coins exposes the investor to the risk of loss and theft
  • 4. 1. Physical Risks
    Costs are involved to limit this risk
    The transport of gold needs to be insured
    Gold has to be kept in a personal safe at home or, better
    In the bank’s safety deposit box
    Here, renting fees incur
  • 5. 1. Physical Risks
    A bank vault is probably the safest place for storing gold
    However, investors should not believe that the bank will store the precious metal for generations
  • 6. 1. Physical Risks
    HSBC customers had to face this situation
    The bank asked end of 2009 its small retail customers to remove their gold from the banks’ New York vault
    This resulted in an armada of armored cars, bringing gold out of New York
  • 7. 1. Physical Risks
    Another advantage of a bank safety deposit box is that the gold is not immediately available
    As it can be only accessed during bank hours
  • 8. 1. Physical Risks
    Another issue is the insurance limit
    In Germany, for example, bank safety deposit boxes are insured only until US$ 28,000
    With the current gold price, this corresponds to 20 gold coins (each 1 ounce), or 567 gram
  • 9. 1. Physical Risks
    How secure are safety deposit boxes?
    In the first quarter of 2010, thieves removed in a bank in Paris the contents of around 100 safety boxes
    A couple of month later, in French Bank, nearly 200 safety boxes were cracked open and its contents stolen
  • 10. 1. Physical Risks
    Property insurance usually either has a limited cover for loss of physical gold, or does not cover it at all
    In both places, additional coverage needs to be purchased
  • 11. 1. Physical Risks
    Besides safety boxes and personal safes at home, some people bury their gold on their property (midnight gardening)
    Will this reduce the risk of physical gold?
    In some ways yes, as it reduces the likelihood of theft
    However, those people should make sure to dig out the gold when they move (or die)
  • 12. 1. Physical Risks
    Besides safety boxes and personal safes at home, some people bury their gold on their property (midnight gardening)
    Will this reduce the risk of physical gold?
    In some ways yes, as it reduces the likelihood of theft
    However, those people should make sure to dig out the gold when they move (or die)
    Exchange risks refer to the exchanges where gold and futures are traded, and not to currency risks
    The two major gold futures exchanges are the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM)
    Trading at these and all other exchanges is subject to their rules and regulations
    The exchanges can on purpose or accidentally foster market outcomes by changing their trading rules
    What events can happen at an exchange?
    1. Margin Requirement Change
    A margin requirement states how much money needs to be available in the futures account to be able to speculate on future contracts
    The higher the margin requirement, the more money is needed to control the same amount of the underlying asset
    If the margin in the margin account is below the margin requirement, then the investor either has to increase the margin, or sell securities
    Thus, rising the margin will in average result in more selling and as a consequence in price droppings
    In December 2009, COMEX raised the margin requirements for gold (and silver) contracts
    It was speculated that this increase would result in a bearish future gold market for three to six months
    2. Liquidation only
    Here, the exchange temporarily restricts buying, thus driving the prices down
    COMEX restricted silver buying in 1980, when it reached an all-time high of US$ 50
    Will the exchange also declare a “liquidation-only” policy on gold, which also trades for a record price?
    3. Halt trading:
    This event is the most extreme measure
    Here, an exchange temporarily halts the trading of a particular future contract
  • 21. 3. Volatility
    The price of gold, as of every traded asset, is subject to the ups and downs of the market
    The rate of this precious metal can fluctuate fundamentally
    The volatility of gold must be a concern to all short- and long-term investors
  • 22. 3. Volatility
  • 23. 3. Volatility
    Gold’s value is shaped by demand and supply
    The factors are gold production by gold mines, central banks, investors and the industry (jewelry, electronic etc.)
  • 24. 3. Volatility
    Thinking that it is possible to exactly calculate and predict the gold price is plainly wrong
    There are many factors that influence the price, but cannot be predicted
    Such as the discovery of new gold deposits, and natural disasters that destroy gold mines
  • 25. 3. Volatility
    Other factors that make the gold price unpredictable and volatile:
    The interplay of the international financial system
    Inflation and interest rates
    Alternative investments
    The irrationality of investors
  • 26. 3. Volatility
    In average (especially since the beginning of 2000) the gold price has risen
    This is because of the increased demand in emerging market (predictable),
    Central banks that stepped up their reserves gold reserves (partly predictably) and the financial crisis which made gold a more attractive investment (unpredicted by most)
  • 27. 3. Volatility
    The 10-year upward trend of the gold price asks for caution
    First, gold is now at an all-time high
    Thus, investors who buy gold now do it when the price is as high as never before. Is this a wise move?
  • 28. 3. Volatility
    Second, history tells us that the gold price can fall, and stay down for extended periods
    If someone had bought gold in 1979,
    that investor would have to wait for thirty years until the gold price had reached the same level, so that a sell would not result in a loss (not considering inflation and opportunity costs)
  • 29. 3. Volatility
    Third, oil is in many respects similar to gold:
    both are popular commodities among traders, both are finite resources, extraction is costly and difficult to replace
    The recent history of the oil price should be a warning of the volatility risk of this commodity, and of all assets
  • 30. 3. Volatility
    Oil stood in the beginning of 1999 at a low of US$ 19 per barrel
    In July 2008 oil was at US$ 147
    Within one year the price fell to US$ 34
    This is an unprecedented drop of 77 per cent within just twelve month
  • 31. 3. Volatility
    Could this also happen to gold?
    How to know when the gold price has reached its peak?
  • 32. 3. Volatility
    The volatility of gold is a market risk
    Another market risk is the liquidity risk
    This occurs in thinly traded markets, where sellers have difficulties in finding buyers
    Futures of not actively traded contracts might run into this risk
    Shares of small stock mines might also face liquidity problems
  • 33. 4. Political risks
    The political risk of gold investing means that the government can change laws and regulations that may harm your investment in gold
    These government interventions can happen in the country of the investor or in another country
    Both would have an impact on the gold price
  • 34. 4. Political risks
    First, prohibition of Gold Ownership
    It is thinkable that the government prohibits the possession of gold and requires gold holders to sell their asset to the government at a fixed price
  • 35. 4. Political risks
    In 1934 Franklin D. Roosevelt passed a law that made it illegal to possess gold
    The only exception was gold for industrial and artistic purposes
    The price was fixed at US$ 20.67 for which one ounce of gold had to be exchanged
  • 36. 4. Political risks
    The US congress passed this law to prevent private gold to become a competing currency
    The possession of gold by private citizens with only legalized 39 years later in 1973 by the President Gerald Ford
  • 37. 4. Political risks
    Second, nationalization of gold mines
    Politicians could also nationalize gold mines or heavily tax companies that produce and trade in this precious metal
  • 38. 4. Political risks
    In 2005 Chavez, the Venezuelan president announced the confiscation of the property held by Crystallex, a Toronto-based gold-mining company
    This resulted in a drop of its share price by 50 per cent in a single day
    Besides that, the dictator levied taxes on many foreign companies
  • 39. 4. Political risks
    Third, fixed gold price
    The government could first, limit and control gold trading by restricting the amount of gold to be sold or by determining a fixed price
  • 40. 4. Political risks
    Before 1972 the gold price either directly (classical gold standard) or indirectly (Bretton Woods System) determined the value, and the exchange rates of the currencies of most Western Nations
    Therefore, their governments determined a fixed gold price
  • 41. 4. Political risks
    During this time, the gold rate was not volatile which made trading and speculating in this precious metal a futile act
    Even though currently the gold price follows the law of the market, future governments might reintroduce a fixed gold rate so that the national currency can be pegged to this metal
  • 42. 4. Political risks
    Or the government might decide that gold trades for a too high rate
    The US Commodities Futures Commission already has the authority to dictate a trading halt for futures
    This might be used on gold futures
  • 43. 4. Political risks
    How to anticipate and circumvent these government risks?
    First, an investment in gold mines should occur only in stable countries, such as Canada and Australia (unless high risk investments are desired)
  • 44. 4. Political risks
    Second, it might be wise to distribute personal gold reserves to several countries, in case of confiscation
    Third, investors should always be well-informed about world news which can influence the gold price
  • 45. 4. Political risks
    Second, it might be wise to distribute personal gold reserves to several countries, in case of confiscation
    Third, investors should always be well-informed about world news which can influence the gold price
  • 46. 5. Gold Scams
    Gold scams are
    Market manipulation
    To know the typical gold scams is the first step to avert them
  • 47. 5. Gold Scams
    First, Fraud
    Buying scrap gold (old jewellery) for only half or less of the gold price can be considered as fraud
    Typically Businessmen having this in mind announce their scrap gold sale in local radio stations and rent a hotel lobby on a Saturday morning for this purpose
  • 48. 5. Gold Scams
    Another way of fraud is selling gold numismatic coins at prices which highly surpass the material and collector’s value
    The victims are often old people who can easily be tricked into this business deal
  • 49. 5. Gold Scams
    From time to time Nigeria Emails arrive in the inbox
    Here, a businessman with connections to Nigerian gold mine tries to sell gold by the kilo for prices that are far lower than the current gold rate
    Of course, this was a legal business and gold export licenses did exist
  • 50. 5. Gold Scams
    The only catch, for the transaction it is necessary to fly to Nigeria
    (It is up to the email recipient to decide whether this is a genuine business opportunity)
  • 51. 5. Gold Scams
    Second, Misrepresentation
    Imagine, a bank sells gold which the buyer never physically receives, but which is stored in the bank’s vault
    The bank further charges the gold owner storage fees
    So fine so good
  • 52. 5. Gold Scams
    Let’s now assume the owner of the precious metal insists on seeing the gold
    Now it is discovered that the bank never actually possessed the gold
    How would one call the bank asking for storage fees of something that was never stored?
  • 53. 5. Gold Scams
    Do you think this incident is highly hypothetical, or would only happen in dodgy countries?
  • 54. 5. Gold Scams
    Well, this allegedly happened at the bank Morgan Stanley
    In 2005 a class-action suit was filed against Morgan Stanley
  • 55. Gold Scams: Three Types
    The bank was accused of selling between 1986 and 2005 physical gold and other precious metal to clients who paid fees for storage at this bank
    But allegedly Morgan Stanley either made no or a different investment on behalf of its clients
  • 56. Gold Scams: Three Types
    The result was that Morgan Stanley would pay US$ 4.4m to settle this class action suit
    "While we deny the allegations, we settled the case to avoid the cost and distraction of continued litigation," Morgan Stanley said in a statement
  • 57. 5. Gold Scams
    Third, Market Manipulation
    What is market manipulation?
    These are actions that try to distort the market equilibrium out.
  • 58. 5. Gold Scams
    For example, in the beginning of 2007 there was an incident regarding naked short-selling among stocks of smaller mining companies
    Here, shares were massively sold to force the price of the shares down
  • 59. 5. Gold Scams
    Also, governments could be labelled as market manipulators if the restrict the free trade of gold
    Vietnam is such as case
    In the beginning of 2011 it was reported that the government had plans to ban the trade of gold bars on the free market
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