People often ask or wonder how they can get started in investing in gold and other bullion products, and on occasion I have offered some guidance. I thought that blogging about it would be a lot more effective than explaining the same thing in emails to different people, and also I want to give a heads up that now would be a good time to start if you haven't yet done so. 

So... maybe you're wondering:
What is the big deal?
Why is the gold price such an important economic indicator?
Is it a good idea to put my hard-earned money into precious metals rather than a bank savings account?
When is the best time to buy and sell?


And probably the biggest question...
How in heaven's name do I do this??


If you are not interested in answers to any of the above questions, you don't have to continue reading because I don't want to waste your time. But if those questions have been a burning issue for you, keep reading. I hope what I have to share with you will be useful in a very big way.  


History of money

Gold has been a store of value since the beginning of (human) time. Gold and silver was money, and that and other valuable goods was the only money that was used to trade. When one bought something, you would pay with a certain amount of metal coins that represented the exchange value. What is significant about this is that the value of the coin was actually IN the coin. What I mean by this is that if something cost R50, you would pay in coins of, for example, silver that represented R50. You could melt it down, damage it, break it in half, the value would remain the same at R50, because it has an intrinsic value.

Over time, to simplify things (or so they'd like us to believe), other forms of money was introduced. Governments decided that paper money would be a good idea. In the not-too-distant past, currencies were backed by the gold standard. A reserve bank of a country held gold in reserve, and they printed paper money to represent the amount of gold that was held. In this way, it was easier for people to handle a piece of paper that represented an amount of money than the actual money. The piece of paper itself was worthless, as you could put a match to it and it would disappear into nothingness. It is basically an IOU issued by an authority (like a government) against the actual value of 'money' held in safekeeping. 


Fiat currency is born

Fast forward to last century, and 1971 marks the end of the gold standard. What this means is that the money printed is no longer backed by physical gold, or anything of value. Currencies are now what is referred to as "fiat currencies". A fiat currency is intrinsically useless, and is used only as a medium of exchange. Governments can print bogus money, and they do. Under the presidency of George W. Bush, the US government printed over a trillion dollars in bogus money. Yes...over a TRILLION US DOLLARS... over $1,000,000,000,000.00 in money that for all intents and purposes does not exist, but is circulating in the economy. I don't have the current figures now, but I can guarantee that it is a lot higher. The downfall of the world economic system should not have come as a shock to anyone then. This is of course not the only thing that contributed to it, but it played a big part.  

If the dangers of paper money is anything to be even slightly afraid of, electronic money that we have now is even worse, and the idea should terrify anyone that remotely even sits down to think about it. For today, I'll skip the rest of my rant about electronic money and get to the point. 

The death of the gold standard is also what caused, and causes, fluctuation in the value of gold and other precious metals. It now operated in a free market economy where the price of the metal fluctuates in response to a number of factors. I will concentrate on gold because that's the area where I have done most of my research in, and also where I feel comfortable speaking about. Other bullion metals behave very similarly, but might typically respond to different market conditions. 


Definitions

Now might be a good time to introduce some definitions that I have been using and will use for the rest of this post and the next one.

bullion  -   precious metals like gold, silver or platinum in the form of bars or coins
bull market -  a financial market in which prices are rising or expected to rise
bear market - a financial market in which prices are falling or expected to fall
correction -   a reverse movement, or temporary decline in price interrupting an uptrend
gold price -   the price of gold per troy ounce or kilogram



In South Africa, the price we pay for gold is dependent on 2 things, namely:
  • demand for gold (which is further dependent on many factors)
  • The ZAR/US$ exchange rate (because the official gold price is given in $ per oz)

Why the growth in gold price?

When global economic confidence is low, the value of gold shoots up. When economic confidence increases, it recovers slightly in the form of a correction. Gold has been on a bull run since the inception of fiat currencies. Corrections do occur every so often, and that is the best time to purchase, in whatever form you may choose to. The gold price always recovers from corrections to continue its bull run once more. Of course, there is no guarantee that it will actually continue to do that, but past performance of the past 4 decades speaks for itself. Just have a look at the krugerrand chart below, with prices ranging from R27 at inception to over R14,000 per oz currently.


Source: 
http://www.investgold.co.za/#!Krugerrand-Performance/zoom/ccjb/i0sex


Typically, when a political or economic event occurs, panic sets in and investors stockpile gold. Demand for gold increases rapidly. The price goes up, and then stabilises at that high level. When another event occurs it starts to rise again and stabilises again at a higher level. The US dollar weakening is another cause for panic, and investors buy gold in mass again. For us in South Africa, the weakening of the US dollar usually causes a knock-on effect of the Rand weakening even further against the dollar so the ZAR/US$ rate rises, causing the price to rise even further for us. All of these have an effect of building up the price more and more and fuelling the bull run. 

If you put the pieces of what I said above together, you get the reason why you should not save all of your money in a bank. Store it in assets, real assets that appreciate in value. Cash depreciates in value and becomes more and more worthless as time passes. Why be a victim of inflation?

The chart below shows the 10-year chart for the gold price. The price is shown in US$. 
If we take into account the exchange rate, the low would be at R2,685 per oz and the current price at R14,000.
 That equates to a growth of over 500% over the span of 10 years, and it includes the negative effect of the correction.


Source: http://www.kitco.com/charts/popup/au3650nyb.html

It can be clearly seen in the above chart that we are currently in a correction. What might not be apparent from that particular chart is that we are also in a correction WITHIN a correction. This is why now would be a good time to invest in gold. 


Next steps

Even if you have very little money to start with, you too can play the system and benefit from this incredible opportunity. It is so easy for anyone to get started, even kids can (and do!) do it. I think the main reason many people are afraid is because a lack of knowledge and understanding.

In my next posts, I will cover a few different ways of investing in gold, and the advantages and disadvantages of the different methods. Some of the methods include:
  • Krugerrands
  • Rare gold coins
  • Gold exchange traded funds
  • Co-ownership plans
  • Monthly investment plans
The stats that I've covered in this post is just the increase in the pure gold price alone. Using some of the instruments mentioned in the bullets, this growth can be leveraged to throw the gains you see in these charts out of the water. It is not uncommon to get growths of over 1450% in under 10 years using the right instruments and practically no risk. 

For Part 2, click here.