Saturday, November 28, 2009

Peak Gold

Most have heard about Peak Oil – the proposition that world oil production has peaked and is in terminal decline. Now, Peak Gold is being proclaimed by industry experts. Vincent Borg, spokesman for the world’s biggest gold producer Barrick Gold, says gold production has been in decline since 2001. Total gold production peaked at 2,600 tonnes per year around 2000. The reason gold production has peaked is that existing mines are being depleted and new discoveries are few and small. Also, it takes many years to bring a resource discovery into production.

Demand, on the other hand, has increased to 3,800 tonnes in 2009 according to the World Gold Council. Over the decade from 1999 to 2009 central banks have sold 3,867 tonnes of their gold under various Central Bank Gold Agreements. These agreements have now ended and no more central bank selling is planned. Even with central bank selling the gold price has increased well over 200% since 1999. During the last several years a number of Gold Exchange Traded Funds have appeared. These are funds that sell shares to investors that track the price of gold. These funds must purchase and hold physical gold to back the shares. Currently these funds hold 2,000 tonnes of gold and represent a major new source of demand. The financial crisis that began in 2007 adds other demands as large institutional investors that have never owned gold before move into the market. New small investors are attracted to buy into the funds, coins and jewellery.

It appears that Peak Gold is real. Given the current climate – the gold price has only one way to go.

An interesting fact: The total amount of gold ever produced will fill a little more than 3 Olympic-size swimming pools. Here is the calculation. The World Gold Council estimates 163,000 tonnes of gold exists above ground today. That is 163,000,000 kg. The density of gold is 19,300 kg per cubic meter. Dividing 163,000,000 kg by 19,300 kg per cubic meter gives 8456 cubic meters as the volume of all the gold in existence. The volume of an Olympic-size swimming pool is 2,500 cubic meters (50 m by 25 m by 2 m). Dividing 8456 cubic meters by 2,500 cubic meters give 3.34 Olympic-size swimming pools as the volume of the gold in the world.

Wednesday, October 21, 2009

Where to Buy Gold

Deciding where to buy physical gold products is a very important decision. This article provides guidance to help you decide where to make gold purchases. The knowledge you need to find the best place for you to buy gold consists of general knowledge and knowledge specific to gold

Use the same common sense approach you use to make any major purchase. After determining exactly what you want to buy make a list of potential sellers. Write the seller’s details down. These details include the seller’s physical address, contact information, and web site address. Next, write a small set of criteria based on which you will select your top three sellers. Some criteria to consider are as follows. How long the company has been in business. Their terms and conditions related to payment procedures, return policy, and buying back. Recommendations from those you know and trust that have done business with the company. Find or make your own gold price comparisons for the items you want.

Use the Internet to search out any information you can find on others experience with the company. Don’t be afraid to call the company and tell them you are evaluating them and ask any questions you need answered. It is important to find a person at the company that will be your main contact. By this point you will be able to pick your top two or three companies.

One approach is to test your sellers buy making a small purchase from each of the selected sellers. Another approach is to make a purchase each month from a different seller. In any case, determine all the costs involved in each purchase including taxes, shipping and insurance before completing the transaction. Based on this experience you will have found some good companies to deal with. Ideally you will develop a long term relationship with a good company.

Here are some gold specific things to keep in mind when deciding where to buy gold. Look for coin shops near you that you can visit. Look at government and private Mints. eBay is an alternative suited to some. As gold becomes more popular you will see many more advertisements for gold products. Be very careful about these offerings and remember the process given above. If it seems too good to be true – it is!

Saturday, September 26, 2009

Investing in Gold

Investing in gold usually means long term investing for five to ten years or more. The chart below shows Gold priced in US Dollars from 1973 to the present.

One ounce of gold purchased in 1973 for $64 is now worth more than $900. This represents a “return on investment” greater than 1000%.

By studying the markets some may be able to make good timing decisions. Charts such as DOW/Gold can aid in spotting trends and more importantly major trend changes. The Dow Jones Industrial Average, the DOW, is computed based on the stock prices of 30 of the largest and most widely held public companies in the United States. The value of the DOW in 1973 was about $1000 and dividing that by $64 is 16. The ratio made a high of 44.70 in 1998 and has declined since to about 10.

The chart shows that since 2000 gold has in general been a better investment than stocks.

A summary of gold price performance is shown below.

Saturday, January 10, 2009

Spot Gold Price

What is the current or "spot" gold price and where does this price come from? The spot gold price is based on the price of "futures" contracts traded on "futures exchanges" operating in a number of countries.

Futures contracts, or just Futures, are standardized contracts for delivery (the seller delivers) or receipt (the buyer receives) some fixed quantity and quality of a commodity. Futures Exchanges exist in many countries to facilitate commercial trade of all major commodities. These commodities include energy products such as crude oil and natural gas, "softs" including wheat, corn, and soya beans, and metals like copper, lead and zinc. The range includes cattle, pigs, eggs, coffee and even orange juice. Gold, silver, platinum and palladium are also traded as futures.

Futures contracts are available for each month of the year. That is, a contract for delivery of December wheat can be purchased in May the year before. The purpose of futures contracts are to allow commercial producers and consumers to establish guaranteed prices and guaranteed supply of the underlying commodity. For example, a large commercial bakery that needs many thousands of bushels of wheat each month uses the futures market to ensure it has wheat at a known price for many months into the future. This practice is called hedging. There are other participants in the futures market. One large class is the speculators. Speculators buy and sell futures contracts hoping to make money on the price fluctuations - they do not intend to actually take delivery, or deliver, the commodity.

Futures contracts are traded on the floor of the exchange. You have probably seen views of this on television - people in colored vests screaming and making hand signals in what looks like total chaos. This is called an "open outcry auction" market. It is anything but chaos. The people in the colored vests work for brokers who have a "seat" on the exchange. They are buying and selling futures contracts for their clients. The details of the contracts that are bought and sold are entered into the computer system of the exchange. The exchange publishes the price and related data such as the number of contracts (volume) in real-time. The exchange sells these data feeds to companies that then make them data available to traders via brokerage houses and eventually to the public via websites like and newspapers.

The most recognized gold price comes from the COMEX located in New York. COMEX (Commodity Exchange) is the leading commodity exchange in the US for metals and is a division of the NYMEX (New York Mercantile Exchange). The process of determining spot gold prices on the COMEX is specified in the NYMEX "Rule Book."

The real-time, second by second, spot price of gold is the price of the futures contract of the "most active month" as it is trading on the exchange. The most active nearby month is called the "spot month." Even though there are contracts for every month of the year, some contracts are only lightly traded. In order to get an accurate spot gold and silver price the exchange uses the most active nearby month.

The "closing spot price" for the day is derived from that day's trading of the spot month futures contract. The COMEX futures trading in gold closes at 1:30 PM Eastern Standard Time. COMEX is currently operating under the following rules to calculate the daily spot close of the gold price: "Notice No. 185 of 22 June 2001 Amendments to COMEX Futures and Option Settlement Procedures" and specifically "AMENDMENTS TO COMEX RULES 4.91, 4.92 AND 4.93":

"Rule 4.91 - Futures Settlement Prices

(a) Active Month. The settlement price of the most active futures contract month shall be the average (rounded off to the nearest price tick) of the highest and lowest prices of the trades reported during the closing period, except as otherwise provided in this rule or in Rule 4.93 ("Use of Discretion to Establish Settlement Price")."

The "closing period" for gold is the last two minutes of trading. To summarize, the real-time spot price of gold is the price of the most active futures, or spot month, contract as it trades on the exchange. The spot gold close is calculated as the average of the highest and lowest prices of the trades during the last two minutes of closing period which is 1:28-1:30 PM in New York.

The spot gold price is provided in US Dollars in the spot gold chart at top of the website and in real time or tic by tic on the live gold price page. The spot gold price is converted from US Dollars to 29 major national currencies which are available on the gold price per ounce page. There are also conversions for the 29 different national currencies available in grams and kilos on the gold price per gram and gold price per kilo pages.

Gold contracts on COMEX are for 100 troy ounce bars. If you have a futures trading account with a broker on the exchange you can buy a gold contract and take delivery of the physical gold when the contract period ends. COMEX has a number of gold storage locations in the United States. You can go to one of these locations and get your gold bars. Also, services such as Brinks can deliver them to you.

Buying physical gold from COMEX is quite involved. Most people find it more practical to purchase physical gold in smaller amounts such as 1 ounce bullion bars and gold coins from dealers. You may be surprised to see the difference in spot gold price on the COMEX and actual gold prices today for small amounts of gold coins. For example, you can check the current gold coin (and silver coin) prices for items sold on eBay at eBay Gold Prices and eBay Silver Prices.

Saturday, January 3, 2009

Gold Price

There are two ways to look at the price of gold. The most common way is to think of gold price in terms of a national currency such as US Dollars. We tend to think this way because gold is quoted as being worth some number of currency units. We buy and sell gold in currency units. As the gold price fluctuates we think of how many currency units we can get for an ounce of gold.

The other way to think about gold price is that currency units are a function of gold. Thinking this was means gold is a constant and currency units fluctuate. For example, in 1792 the US Congress passed the Coinage Act that fixed the US Dollar to be 24.75 grains (0.052 troy ounces) of gold. In 1837 Congress redefined the Dollar to be 25.8 grains of 90% gold. That works out to be $20.67 for one troy ounce of pure gold. This gold price was maintained for almost one hundred years from 1837 to 1933. In 1934 President Roosevelt devalued the Dollar to be worth $35 for once ounce of gold. President Nixon removed the link between the Dollar and gold in 1971. Since that time the gold price has been free to move based on market demands. Gold has gone from $34 in 1971 to over $1000 in 2008. The Dollar has lost 97% of its value versus gold in thirty eight years.

For most of history gold was money. Paper currencies, or now, digital accounting, are a fairly recent development. Some argue that looking at gold as the constant is the proper and more fundamental view and currency unit price is basically a fad. Both perspectives are necessary today as they are really just two sides of the same coin.