Exotic Investment

8/12/2019 Exotic Investment

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EXOTIC INVESTMENT IN GOLD AND SILVER

M.COM II (BANKING & FINANCE)

SIES COLLEGE OF COMMERCEANDECONOMICS

Exotic investment in

gold and silver

INTRODUACTION

All the precious metals, gold is the most popular as an investment. Investorsgenerally buy gold as a hedge or harbor against economic, political, or social fiat

currency crises (including investment market declines, burgeoning national debt,

currency failure, inflation, war and social unrest). The gold market is subject to

speculation as are other markets, especially through the use of futures contracts and

derivatives. Gold price has shown a long term correlation with the price of crude oil.

This suggests a reason why gold is sold off during economic weakness.


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Gold price history in 19602012

Gold price per gram between Jan 1971 and Jan 2012. The graph shows nominal

price in US dollars, the price in 1971 and 2011 US dollars

Gold has been used throughout history as money and has been a relative standard for

currency equivalents specific to economic regions or countries, until recent times.

Many European countries implemented gold standards in the latter part of the 19th

century until these were temporarily suspended in the financial crises involving

World War I. After World War II, the Bretton Woods system pegged the United

States dollar to gold at a rate of US$35 per troy ounce. The system existed until the1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of

the United States dollar to gold and made the transition to a fiat currency system.

The last currency to be divorced from gold was the Swiss Franc in 2000.

Since 1919 the most common benchmark for the price of gold has been the London

gold fixing, a twice-daily telephone meeting of representatives from five bullion-

trading firms of the London bullion market. Furthermore, gold is traded

continuously throughout the world based on the intra-day spot price, derived from

over-the-counter gold-trading markets around the world (code "XAU"). The

following table sets forth the gold price versus various assets and key statistics on

the basis of data taken with the frequency of five years.

The analysis of log-linear oscillations in the gold price dynamics for 20032010

conducted in 2010 by Askar Akayev's research group has allowed them to forecast a

collapse in gold prices in MayJuly 2011. As of 18 July 2011, this collapse had notyet occurred, with gold at record prices of over $1600 per ounce. On 22 August

2011 gold reached a new record high of $1908.00 at the London Gold Fixing. The

predicted collapse actually took place in AugustSeptember 2011. Yet, on 19 June

2012, gold zoomed further to INR 30,750 per 10 gm in the New Delhi, breaking its

previous record of all time high. On 13 June 2012, gold prices breached INR 30,000


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(Rupee) mark due to global financial uncertainty and touched the record high of INR

30,420 per 10 gms.

However, further collapse of gold prices was observed in April 2013.

Influencing factors

A car in Manhattan's East Village advertising cash for gold

Today, like most commodities, the price of gold is driven by supply and demand as

well as speculation. However unlike most other commodities, saving and disposal

plays a larger role in affecting its price than its consumption. Most of the gold evermined still exists in accessible form, such as bullion and mass-produced jewelry,

with little value over its fine weight and is thus potentially able to come back

onto the gold market for the right price. At the end of 2006, it was estimated that all

the gold ever mined totaled 158,000 tones (156,000 long tons; 174,000 short tons).

The investor Warren Buffett has said that the total amount of gold in the world that

is above-ground, could fit into a cube with sides of just 20 meters (66 ft). However

estimates for the amount of gold that exists today vary significantly and some have

suggested the cube could be a lot smaller or larger.

Given the huge quantity of gold stored above-ground compared to the annual

production, the price of gold is mainly affected by changes in sentiment (demand),

rather than changes in annual production (supply). According to the World Gold

Council, annual mine production of gold over the last few years has been close to


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2,500 tonnes. About 2,000 tonnes goes into jewelry or industrial/dental production,

and around 500 tonnes goes to retail investors and exchange traded gold funds.

Central banksCentral banks and the International Monetary Fund play an important role in the

gold price. At the end of 2004 central banks and official organizations held 19

percent of all above-ground gold as official gold reserves. The ten-year Washington

Agreement on Gold (WAG), which dates from September 1999, limits gold sales by

its members (Europe, United States, Japan, Australia, Bank for International

Settlements and the International Monetary Fund) to less than 500 tonnes a year.

European central banks, such as the Bank of England and Swiss National Bank,

were key sellers of gold over this period. In 2009, this agreement was extended for a

further five years, but with a smaller annual sales limit of 400 tonnes.

Although central banks do not generally announce gold purchases in advance, some,

such as Russia, have expressed interest in growing their gold reserves again as of

late 2005. In early 2006, China, which only holds 1.3% of its reserves in gold,

announced that it was looking for ways to improve the returns on its official

reserves. Some bulls hope that this signals that China might reposition more of its

holdings into gold in line with other Central Banks. India has recently purchasedover 200 tons of gold which has led to a surge in prices.

It is generally accepted that interest rates are closely related to the price of gold. As

interest rates rise the general tendency is for the gold price, which earns no interest,

to fall, and as rates dip, for gold price to rise. As a result, gold price can be closely

correlated to central banks via the monetary policy decisions made by them related

to interest rates. For example if market signals indicate the possibility of prolonged

inflation, central banks may decide to enact policies such as a hike in interest rates

that could affect the price of gold in order to quell the inflation. An opposite reaction

to this general principle can be seen after the European Central bank raised its

interest rate on April 7, 2011 for the first time since 2008. The price of gold

responded with a muted response and then drove higher to hit new highs one day


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later. A similar situation happened in India: In August 2011 when the interest rate

were at their highest in two years, the gold prices peaked as well.

Hedge against financial stress

Gold, like all precious metals, may be used as a hedge against inflation, deflation or

currency devaluation. As Joe Foster, portfolio manager of the New York-based Van

Eck International Gold Fund, explained in September 2010:

The currencies of all the major countries, including ours, are under severe pressurebecause of massive government deficits. The more money that is pumped into these

economiesthe printing of money basically then the less valuable the currencies

become.

If the returns on bonds, equities and real estate do not adequately compensate for

risk and inflation, then the demand for gold, and other alternative investments (such

as commodities) increases. An example of this is the period of stagflation that

occurred during the 1970s, which led to an economic bubble forming aroundinvestment in precious metals. However, after a period of financial stress, such as

the Great Recession, eases conventional investments become more attractive, and

gold values may fall.

Jewelry and industrial demand

Jewelry consistently accounts for over two-thirds of annual gold demand. India isthe largest consumer in volume terms, accounting for 27% of demand in 2009,

followed by China and the USA.

Industrial, dental and medical uses account for around 12% of gold demand. Gold

has high thermal and electrical conductivity properties, along with a high resistance

to corrosion and bacterial colonization. Jewelry and industrial demand has fluctuated


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over the past few years due to the steady expansion in emerging markets of middle

classes aspiring to Western lifestyles, offset by the financial crisis of 20072010.

Gold jewelry recycling

In recent years the amount of second-hand jewelry being recycled has become a

multi-billion dollar industry. Some companies have been offering good prices and

fair services for their customers. However there are many companies that have been

caught taking advantage of their customers, paying a fraction of what the gold or

silver is really worth, leading to distrust in many companies.

Short selling

Short selling of gold can be done in either futures markets or physical markets and

negative delta positions can be taken in many other derivatives. Trading in futures

markets is an important driver of gold prices and this has led to repeated claims of

market manipulation, mostly by people who believe that gold prices have been

artificially suppressed. These claims center largely around naked short selling, aterm usually used for an often abusive practice of shorting stocks without first

locating a source to borrow the stocks from. It is not usually used in the context of

futures trading for any non-precious metal commodity as a very large percentage of

futures trading in any commodity is done by speculators who have no ability or

intention to deliver the commodity but intend on closing their positions prior to

contract expiration.

Many claims about abusive short-selling center around the London Bullion Market

Association, the United States Federal Reserve System, and the banks HSBC and

JPMorgan Chase. Gold market observers have noted for many years that the price of

gold tends to fall artificially at the start of New York trading. Andrew Maguire, a

former Goldman Sachs trader, went public in April 2010 with assertions of market

manipulation by JPMorgan Chase and HSBC of the gold and silver markets,


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prompting a number of lawsuits. Andrew Maguire was an independent trader at the

time of these accusations and the CFTC has taken no action against any entity

concerning precious metal price manipulation.

War, invasion and national emergency

When dollars were fully convertible into gold via the gold standard, both were

regarded as money. However, most people preferred to carry around paper

banknotes rather than the somewhat heavier and less divisible gold coins. If people

feared their bank would fail, a bank run might result. This happened in the USA

during the Great Depression of the 1930s, leading President Roosevelt to impose a

national emergency and issue Executive Order 6102 outlawing the "hoarding" of

gold by US citizens. There was only one prosecution under the order, and in that

case the order was ruled invalid by federal judge John M. Woolsey, on the technical

grounds that the order was signed by the President, not the Secretary of the Treasury

as required.


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Investment vehicles

Bars

1 troy ounce (31 g) gold bar with certificate

The most traditional way of investing in gold is by buying bullion gold bars. In some

countries, like Canada, Austria, Liechtenstein and Switzerland, these can easily be

bought or sold at the major banks. Alternatively, there are bullion dealers that

provide the same service. Bars are available in various sizes. For example in Europe,

Good Delivery bars are approximately 400 troy ounces (12 kg). 1 kilogram (32 ozt)

are also popular, although many other weights exist, such as the 10oz, 1oz, 10 g, 100g, 1 kg, 1 Tael, and 1 Tola.

Bars generally carry lower price premiums than gold bullion coins. However larger

bars carry an increased risk of forgery due to their less stringent parameters for

appearance. While bullion coins can be easily weighed and measured against known


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values to confirm their veracity, most bars cannot, and gold buyers often have bars

re-assayed. Larger bars also have a greater volume in which to create a partial

forgery using a tungsten-filled cavity, which may not be revealed by an assay.

Good delivery bars that are held within the London bullion market (LBMA) system

each have a verifiable chain of custody, beginning with the refiner and assayer, and

continuing through storage in LBMA recognized vaults. Bars within the LBMA

system can be bought and sold easily. If a bar is removed from the vaults and stored

outside of the chain of integrity, for example stored at home or in a private vault, it

will have to be re-assayed before it can be returned to the LBMA chain. This process

is described under the LBMA's "Good Delivery Rules".

The LBMA "traceable chain of custody" includes refiners as well as vaults. Bothhave to meet their strict guidelines. Bullion products from these trusted refiners are

traded at face value by LBMA members without assay testing. By buying bullion

from an LBMA member dealer and storing it in an LBMA recognized vault,

customers avoid the need of re-assaying or the inconvenience in time and expense it

would cost. However this is not 100% sure, for example, Venezuela moved its gold

because of the political risk for them, and as the past shows, even in countries

considered as democratic and stable, for example in the USA in the 1930s gold was

seized by the government and legal moving was banned.

Efforts to combat gold bar counterfeiting include kinebars which employ a unique

holographic technology and are manufactured by the Argor-Heraeus refinery in

Switzerland.

Coins


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The faces of a Krugerrand, the most common gold bullion coin.

Gold coins are a common way of owning gold. Bullion coins are priced according to

their fine weight, plus a small premium based on supply and demand (as opposed to

numismatic gold coins which are priced mainly by supply and demand based on

rarity and condition).

The Krugerrand is the most widely-held gold bullion coin, with 46,000,000 troy

ounces (1,400 tonnes) in circulation. Other common gold bullion coins include the

Australian Gold Nugget (Kangaroo), Austrian Philharmoniker (Philharmonic),

Austrian 100 Corona, Canadian Gold Maple Leaf, Chinese Gold Panda, Malaysian

Kijang Emas, French Napoleon or Louis d'Or, Mexican Gold 50 Peso, BritishSovereign, American Gold Eagle, and American Buffalo.

Coins may be purchased from a variety of dealers both large and small. Fake gold

coins are not uncommon, and are usually made of gold-plated lead.

Exchange-traded products

Gold exchange-traded products may include exchange-traded funds (ETFs),

exchange-traded notes (ETNs), and closed-end funds (CEFs) which are traded like

shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities

(ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock


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Exchange, and originally represented exactly 0.1 troy ounces (3.1 g) of gold. As of

November 2010, SPDR Gold Shares is the second-largest exchange-traded fund in

the world by market capitalization.

Gold Exchange-traded products (ETPs) represent an easy way to gain exposure to

the gold price, without the inconvenience of storing physical bars. However

exchange-traded gold instruments, even those which hold physical gold for the

benefit of the investor, carry risks beyond those inherent in the precious metal itself.

For example the most popular gold ETP (GLD) has been widely criticized, and even

compared with mortgage-backed securities, due to features of its complex structure.

Typically a small commission is charged for trading in gold ETPs and a small annual

storage fee is charged. The annual expenses of the fund such as storage, insurance,and management fees are charged by selling a small amount of gold represented by

each certificate, so the amount of gold in each certificate will gradually decline over

time.

Exchange-traded funds, or ETFs, are investment companies that are legally

classified as open-end companies or Unit Investment Trusts (UITs), but that differ

from traditional open-end companies and UITs. The main differences are that ETFs

do not sell directly to investors and they issue their shares in what are called"Creation Units" (large blocks such as blocks of 50,000 shares). Also, the Creation

Units may not be purchased with cash but a basket of securities that mirrors the

ETF's portfolio. Usually, the Creation Units are split up and re-sold on a secondary

market.

ETF shares can be sold in basically two ways. The investors can sell the individual

shares to other investors, or they can sell the Creation Units back to the ETF. In

addition, ETFs generally redeem Creation Units by giving investors the securities

that comprise the portfolio instead of cash. Because of the limited redeemability of

ETF shares, ETFs are not considered to be and may not call themselves mutual

funds.


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Certificates

Gold certificates allow gold investors to avoid the risks and costs associated with the

transfer and storage of physical bullion (such as theft, large bid-offer spread, andmetallurgical assay costs) by taking on a different set of risks and costs associated

with the certificate itself (such as commissions, storage fees, and various types of

credit risk).

Banks may issue gold certificates for gold which is allocated (fully reserved) or

unallocated (pooled). Unallocated gold certificates are a form of fractional reserve

banking and do not guarantee an equal exchange for metal in the event of a run on

the issuing bank's gold on deposit. Allocated gold certificates should be correlated

with specific numbered bars, although it is difficult to determine whether a bank is

improperly allocating a single bar to more than one party.

The first paper bank notes were gold certificates. They were first issued in the 17th

century when they were used by goldsmiths in England and the Netherlands for

customers who kept deposits of gold bullion in their vault for safe-keeping. Two

centuries later, the gold certificates began being issued in the United States when the

US Treasury issued such certificates that could be exchanged for gold. The United

States Government first authorized the use of the gold certificates in 1863. In theearly 1930s the US Government restricted the private gold ownership in the United

States and therefore, the gold certificates stopped circulating as money (this

restriction was reversed on January 1, 1975). Nowadays, gold certificates are still

issued by gold pool programs in Australia and the United States, as well as by banks

in Germany, Switzerland and Vietnam.

Accounts

Many types of gold "accounts" are available. Different accounts impose varying

types of intermediation between the client and their gold. One of the most important

differences between accounts is whether the gold is held on an allocated (fully

reserved) or unallocated (pooled) basis. Unallocated gold accounts are a form of


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fractional reserve banking and do not guarantee an equal exchange for metal in the

event of a run on the issuer's gold on deposit. Another major difference is the

strength of the account holder's claim on the gold, in the event that the account

administrator faces gold-denominated liabilities (due to a short or naked shortposition in gold for example), asset forfeiture, or bankruptcy.

Many banks offer gold accounts where gold can be instantly bought or sold just like

any foreign currency on a fractional reserve basis.[citation needed] Swiss banks

offer similar service on a fully allocated basis. Pool accounts, such as those offered

by some providers, facilitate highly liquid but unallocated claims on gold owned by

the company. Digital gold currency systems operate like pool accounts and

additionally allow the direct transfer of fungible gold between members of the

service. Other operators, by contrast, allows clients to create a bailment on allocated

(non-fungible) gold, which becomes the legal property of the buyer.

Other platforms provide a marketplace where physical gold is allocated to the buyer

at the point of sale, and becomes their legal property.|} These providers are merely

custodians of client bullion, which does not appear on their balance sheet.

Typically, bullion banks only deal in quantities of 1000 ounces or more in either

allocated or unallocated accounts. For private investors, vaulted gold offers privateindividuals to obtain ownership in professionally vaulted gold starting from

minimum investment requirements of several thousand U.S.-dollars or

denominations as low as one gram.

Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures and options, currently trade on variousexchanges around the world and over-the-counter (OTC) directly in the private

market. In the U.S., gold futures are primarily traded on the New York Commodities

Exchange (COMEX) and Euronext.liffe. In India, gold futures are traded on the

National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity

Exchange (MCX).


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As of 2009 holders of COMEX gold futures have experienced problems taking

delivery of their metal. Along with chronic delivery delays, some investors have

received delivery of bars not matching their contract in serial number and weight.

The delays cannot be easily explained by slow warehouse movements, as the dailyreports of these movements show little activity. Because of these problems, there are

concerns that COMEX may not have the gold inventory to back its existing

warehouse receipts.

Outside the US, a number of firms provide trading on the price of gold via contract

for differences (CFDs) or allow spread bets on the price of gold.

Mining companies

Instead of buying gold itself, investors can buy the companies that produce the gold

as shares in gold mining companies. If the gold price rises, the profits of the gold

mining company could be expected to rise and the worth of the company will rise

and presumably the share price will also rise. However, there are many factors to

take into account and it is not always the case that a share price will rise when the

gold price increases. Mines are commercial enterprises and subject to problems such

as flooding, subsidence and structural failure, as well as mismanagement, negative

publicity, nationalization, theft and corruption. Such factors can lower the share

prices of mining companies.

The price of gold bullion is volatile, but unhedged gold shares and funds are

regarded[by whom?] as even higher risk and even more volatile. This additional

volatility is due to the inherent leverage in the mining sector. For example, if one

owns a share in a gold mine where the costs of production are $300 per ounce and

the price of gold is $600, the mine's profit margin will be $300. A 10% increase inthe gold price to $660 per ounce will push that margin up to $360, which represents

a 20% increase in the mine's profitability, and possibly a 20% increase in the share

price. Furthermore, at higher prices, more ounces of gold become economically

viable to mine, enabling companies to add to their production. Conversely, share

movements also amplify falls in the gold price. For example, a 10% fall in the gold


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price to $540 will decrease that margin to $240, which represents a 20% fall in the

mine's profitability, and possibly a 20% decrease in the share price.

To reduce this volatility, some gold mining companies hedge the gold price up to 18

months in advance. This provides the mining company and investors with less

exposure to short-term gold price fluctuations, but reduces returns when the gold

price is rising.

Investment strategies

Fundamental analysis

Investors using fundamental analysis analyze the macroeconomic situation, which

includes international economic indicators, such as GDP growth rates, inflation,

interest rates, productivity and energy prices. They would also analyze the yearly

global gold supply versus demand. Over 2005 the World Gold Council estimated

yearly global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving

a surplus of 105 tonnes. While gold production is unlikely to change in the near

future, supply and demand due to private ownership is highly liquid and subject to

rapid changes. This makes gold very different from almost every other commodity.

Identifiable investment demand for gold, which includes gold exchange-traded

funds, bars and coins, was up 64 percent in 2008 over the year before.

Gold versus stocks


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Dow/Gold Ratio 19682008

In the last century major economic crises (such as the Great Depression, World War

II, the first and second oil crisis) lowered the Dow/gold ratio, an indicator of how

bad a recession is and whether the outlook is deteriorating or improving, to a value

well below 4. The ratio fell on February 18, 2009 to below 8. During these difficult

times, many investors tried to preserve their assets by investing in precious metals,

most notably gold and silver.

The performance of gold bullion is often compared to stocks due to their

fundamental differences. Gold is regarded by some as a store of value (without

growth) whereas stocks are regarded as a return on value (i.e., growth from

anticipated real price increase plus dividends). Stocks and bonds perform best in a

stable political climate with strong property rights and little turmoil. The attached

graph shows the value of Dow Jones Industrial Average divided by the price of an

ounce of gold. Since 1800, stocks have consistently gained value in comparison to

gold in part because of the stability of the American political system. Thisappreciation has been cyclical with long periods of stock outperformance followed

by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of

1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post

gains throughout the 1980s and 1990s. The gold price peak of 1980 also coincided

with the Soviet Union's invasion of Afghanistan and the threat of the global


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expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and

has fallen sharply since.

On November 30, 2005 Rick Munarriz of The Motley Fool posed the question of

which represented a better investment: a share of Google or an ounce of gold. The

specific comparison between these two very different investments seems to have

captured the imagination of many in the investment community and is serving to

crystallize the broader debate. At the time of writing, a share of Google's stock was

$405 and an ounce of gold was one day from breaking the $500 barrier, which it did

December 1. On January 4, 2008 23:58 New York time, it was reported that an

ounce of gold outpaced the share price of Google by 30.77%, with gold closing at

$859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges.

On January 24, 2008, the gold price broke the $900 mark per ounce for the first

time. The price of gold topped $1,000 an ounce for the first time ever on March 13,

2008 amid recession fears in the United States.[68] Google closed 2008 at $307.65

while gold closed the year at $866. Leading into 2010, Google had doubled off that

(100%), whereas gold had risen 40%.

In his book Basic Economics, Thomas Sowell argued that, in the long-term, gold's

high volatility when compared to stocks and bonds, means that gold does not hold its

value compared to stocks and bonds:

To take an extreme example [of price volatility], while a dollar invested in bonds in

1801 would be worth nearly a thousand dollars by 1998, a dollar invested in stocks

that same year would be worth more than half a million dollars. All this is in real

terms, taking inflation into account. Meanwhile, a dollar invested in gold in 1801

would by 1998 be worth just 78 cents.

Technical analysis

As with stocks, gold investors may base their investment decision partly on, or

solely on, technical analysis. Typically, this involves analyzing chart patterns,


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moving averages, market trends and/or the economic cycle in order to speculate on

the future price.

Using leverage

Bullish investors may choose to leverage their position by borrowing money against

their existing assets and then purchasing gold on account with the loaned funds.

Leverage is also an integral part of buying gold derivatives and unhedged gold

mining company shares (see gold mining companies). Leverage or derivatives may

increase investment gains but also increases the corresponding risk of capital loss

if/when the trend reverses.

Taxation

Main article: Taxation of precious metals

Gold maintains a special position in the market with many tax regimes. For example,in the European Union the trading of recognised gold coins and bullion products are

free of VAT. Silver and other precious metals or commodities do not have the same

allowance. Other taxes such as capital gains tax may also apply for individuals

depending on their tax residency. U.S. citizens may be taxed on their gold profits at

15, 23, 28 or 35 percent, depending on the investment vehicle used.


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Factors that affect the price of gold

Gold is a precious metal with which mankind has had a long and illustrious relation

and continues to do so. Gold served as money until other forms of currency were

devised and even now gold is bought as an investment. The innate high value of gold

makes it a reliable form of wealth, no matter the conditions. This makes it a hedge

against economical fluctuations. The actions of people based on this principle drivethe price of gold.

For the prospective buyer of gold, it is important to know what all factors affect the

rates of gold. This will allow a person to predict with good accuracy the trends in the

rates and thus be able to direct an investment to more profit.

The Five factors influencing price of gold

1) The first factor is rather basic and depends on the simple economics of supply anddemand. This is true of any commodity. If the demand for gold increases

(particularly in the Asian markets of India & China) suddenly and the supply cannot

meet the demand, the prices will increase. Similarly, if production of gold is hit

because of a miners' strike and the supply falls, this will also lead to an increase in

prices. Although there are many hidden factors that are said to influence price of

gold, broadly speaking, there are only a few factors that certainly do. The remaining

factors are generally speculative and not mutually agreed upon.

2) The second factor is the gold and other policies of central banks. The banks often

invest in gold as a hedge against inflation. Moreover, their other policies on interest

offered on savings also affect the prices. A higher interest rate will lead to people

investing in currency, whereas a low interest will increase gold purchase.


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3) The third factor is the social conditions prevalent. In times of war, emergencies,

the price of gold shoots up as the value of the prevalent currency is in doubt. Since

one can be sure of the value of gold, people try to acquire as much gold as they can,

pushing up the price of gold.

4) The fourth factor is the state of the economy. If the economy is in the doldrums

with the markets performing in a shabby manner like now, prices of gold will

increase due to more people choosing to invest in gold.

5) The fifth factor is the value of the US Dollar. Since the dollar is the currency that

most people incest in any fall in its value will lead to the prices of gold shooting up.

The gold rate has always had this relationship with the Dollar ever since the dollar

became the global trading currency.

Increase in demand of gold

Gold prices are not subject to the volatility of the stock market and will always be,

for jewellery and as against inflation in great demand in India. Additional gold is

being held by those who have accounted money. The demand will therefore only

increase and as prices in India will be lower then abroad in the foreseeable futuresmuggling in large quantities will continue. The rewards make the risks worthwhile.

When one purchase gold ornaments one should remember the following

The lower the carat purity the stronger it is and the better the ornaments will be.

One should avoid buying elaborately designed jewelry as although they may look

beautiful they may be brittle.

If the gold has been soldered it should be with cadmium as it would be much

stronger.


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There is a loss which could be as much as 10 percent when gold ornaments are sold.

This is because gold is usually bought back at a discount of 1 gramme for over 10

grammes.

Gold ornaments earn no income. They are just kept and admired.

Gold attracts wealth tax

Furthermore, no value is placed on the making charges, for workmanship and the

making of the ornaments.

Reasons for investing in gold.

Gold is respected throughout the world for its value and rich history, which has been

interwoven into cultures for thousands of years. Coins containing gold appeared

around 800 B.C., and the first pure gold coins were struck during the rein of King

Croesus of Lydia about 300 years later. Throughout the centuries, people have


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continued to hold gold for various reasons. Below are eight reasons to own gold

today.

A History of Holding Its Value

Unlike paper currency, coins or other assets, gold has maintained its value

throughout the ages. People see gold as a way to pass on and preserve their wealth

from one generation to the next.

Weakness of the U.S. Dollar

Although the U.S. dollar is one of the world's most important reserve currencies,

when the value of the dollar falls against other currencies as it did between 1998 and

2008, this often prompts people to flock to the security of gold, which raises gold

prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-

an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012,

hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a

number of reasons, including the country's large budget and trade deficits and a large

increase in the money supply.

Inflation

Gold has historically been an excellent hedge against inflation, because its price

tends to rise when the cost of living increases. Since World War II, the five years in

which U.S. inflation was at its highest were 1946, 1974, 1975, 1979 and 1980 (as of

2012). During those five years, the average real return on the Dow Jones IndustrialAverage was -12.33%, compared to 130.4% for gold.

Deflation


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Deflation, a period in which prices decrease, business activity slows and the

economy is burdened by excessive debt, has not been seen globally since the Great

Depression of the 1930s. During that time, the relative purchasing power of gold

soared while other prices dropped sharply.

Day Trade Stocks with $500

Geopolitical Uncertainty

Gold retains its value not only in times of financial uncertainty, but in times of

geopolitical uncertainty. It is often called the "crisis commodity," because people

flee to its relative safety when world tensions rise; during such times, it often

outperforms other investments. For example, gold prices experienced some major

price movements this year in response to the crisis occurring in the European Union.

Its price often rises the most when confidence in governments is low.

Supply Constraints

Much of the supply of gold in the market since the 1990s has come from sales ofgold bullion from the vaults of global central banks. This selling by global central

banks slowed greatly in 2008. At the same time, production of new gold from mines

had been declining since 2000. According to BullionVault.com, annual gold-mining

output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however,

according to Goldsheetlinks.com, gold saw a rebound in production with output

hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years to bring a

new mine into production. As a general rule, reduction in the supply of gold

increases gold prices.

Increasing Demand


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In previous years, increased wealth of emerging market economies boosted demand

for gold. In many of these countries, gold is intertwined into the culture. India is one

of the largest gold-consuming nations in the world; it has many uses there, including

jewelry. As such, the Indian wedding season in October is traditionally the time ofthe year that sees the highest global demand for gold (though it has taken a tumble in

2012.) In China, where gold bars are a traditional form of saving, the demand for

gold has been steadfast.

Demand for gold has also grown among investors. Many are beginning to see

commodities, particularly gold, as an investment class into which funds should be

allocated. In fact, SPDR Gold Trust, became one of the largest ETFs in the U.S., aswell as one of the world's largest holders of gold bullion in 2008, only four years

after its inception.

Portfolio Diversification

The key to diversification is finding investments that are not closely correlated to

one another; gold has historically had a negative correlation to stocks and otherfinancial instruments. Recent history bears this out:

The 1970s was great for gold, but terrible for stocks.

The 1980s and 1990s were wonderful for stocks, but horrible for gold.

2008 saw stocks drop substantially as consumers migrated to gold.

Properly diversified investors combine gold with stocks and bonds in a portfolio toreduce the overall volatility and risk.

The Bottom Line


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Gold should be an important part of a diversified investment portfolio because its

price increases in response to events that cause the value of paper investments, such

as stocks and bonds, to decline. Although the price of gold can be volatile in the

short term, it has always maintained its value over the long term. Through the years,it has served as a hedge against inflation and the erosion of major currencies, and

thus is an investment well worth considering.

Silver

INTRODUCATION

silver is the one and only Investment in Silver in India right now, apart from trading

in Silver futures. In India there is no Silver ETF. So Indians can consider investment

in Silver as e-Silver. Gold has many avenues of investment in India. But in case of

silver, there are not many options. Silver coin can't be considered for investment

because of less liquidity. So e-silver is the most used investment in India in Silver.

let us go through the details about e-Silver in India.


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1) What is e-Silver

e-Silver is new type of investment introduced in India by NSEL(National SpotExchange Limited). It is like e-Gold, which is type of investment in Gold in

electronic form. e-Silver is investment in Silver in electronic form. In e-silver

investors buy quantities of Silver and hold it in their demat accounts. Investors can

buy and sell e-Silver from the Pan India online trading platform run by NSEL. e-

Silver can be converted into physical silver like Silver coins and Silver bars.

2)How to buy and sell e-Silver in India?.

Investors can buy and sell e-Silver from the Pan India online trading platform run

byNSEL. Investors has to open a Beneficiary account / Trading account with any of

the members approved by NSEL. Then start a Demat account with Depositary

Participants approved by NSEL.

The list of Members approved by NSEL and Depository Participants approved by

NSEL can be made fetched in the following links. Majority of the members

approved by NSEL has a DP arm or at least some tie ups with Depository

Participants. So you don't have to go to two offices for opening the accounts. You

have to check it before selecting the Member.


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History of uses of silver

Silver is one of the most major of major precious metals, second in acclaim only to

gold, it's big sister in the pantheon of desirability.

The usage of silver came into being sometime between 8,000 and 10,000 years ago.

Although it may have been even earlier - records vary. Certainly we can go back to

the early Egyptian period and the time of the Sumerian Civililisation. Silver mining

was a very dangerous business in those far off days. The problem was that silver is

found while mining for, and so is mixed with, lead. And often the lives of the early

miners lasted for only 2 or 3 years. Lead poisoning was not diagnosed as such in the

early days - though the poor slaves who were actually doing the mining must have

had their suspicions about the very high death tole.

The convenience and use of silver in the coinage of the world has always lent great

respectability to the commodity. And, of course, created a consistently high demand.


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Tragically, many a beautiful silver dinner service has been melted down to provide

coinage for the troops.

The great beauty of silver, its malleability and long (almost permanent) shelf-life

makes it ideal for decorative work. Although the cost and value has varied

enormously over the years, it has always had a great 'investment ' value. In general

the metal value has declined. Though in this writer's opinion it remains a good

investment even now (2004), despite a blip upwards in price these last 12 months.

The relative cost of mining the metal has gone down as firstly more locations have

been found around the world and secondly modern mining methods have reduced

the labor content of exploration and mining. Other products have also becomeavailable, particularly very cheap plastics which can be used where silver may once

have been preferred.

It is very interesting to note that the current value of silver bullion is now

approximately 2% of the value 500 years ago! It's a bargain, as well as a commodity

of great beauty.

The areas where silver is mined are found all over the world, but some of the main

producers are: The U.S.A., Canada, Mexico, Bolivia, Russia, Australia and

Germany.

Whereas the traditional uses for silver, in coinage, jewelry and silver flatware, are

still important, we also need to remember that there is a very large silver content,

mixed with lead, in pewter. Photography, medicine and the production of toiletries

are all important these days, and also make use of this most magnificent of metals.


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Factors that affect the price of silver

Factors Affecting Silver Prices

We have, in our research, tried to identify the most important factors that cause

fluctuations in silver prices. We also tried to understand how their change impacts

silver prices.

Large and Private Institutional Investors

Other than the most influential impact of the Hunt Brothers, in 1997, Warren Buffettpurchased 130 million troy ounces (4,000 metric tons) of silver at approximately

$4.50 per troy ounce (total value $585 million). Also, in April 2006, iShares

launched a silver exchange-traded fund, called the iShares Silver Trust which as of

April 2008 held 180 million Oz silver as reserves6. This clearly indicates that large

investors have the power to affect market prices.

Large Concentrated Short Position

CFTC reported that four or fewer largest traders are holding 90% of all short silver

contracts7. They were short by 245 million troy ounces (as of April 2007), which is

equivalent to 140 days of production.


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Industrial Demand

New applications for silver are being explored in batteries, superconductors andmicrocircuits, which may further increase non-investment demand. The expansion of

the middle classes in emerging economies aspiring to Western lifestyles and

products may also contribute to a long-term rise in industrial usage. Moreover, retail

investors strong interest in ETFs helps to explain the growth in demand from this

group for physical bullion over the rally-to date8.

Gold Prices

Despite all of silvers fundamental drivers, gold is considered as the primary driver

for silver prices9. In a bullish environment, speculators tend to be interested in most

of the precious metals. So it leads to an increase in the investment demand for silver.

Silver having a comparatively smaller market as compared to gold, it does not take

much time to drive the prices higher. At the same time when the environment is

bearish, investors lose confidence in silver very fast and cause the prices to fall.

From the analysis of the trend of the gold-silver ratio, it can be seen clearly thatsilver has a tendency to follow the prices of gold.

During the subprime crisis when the view was bearish we clearly see the trend that

during the days when the prices of gold increased silver also increased. However, it

would pace the gain of gold at best. During the days when the gold prices decreased

we see that the silver prices plummeted by an even greater margin. Based on our

hypothesis we would recommend to buy silver during a recession and to sell duringa boom.

US Dollar


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From our study of the relation between silver and US Dollar we can clearly see that

there exists an inverse relationship between silver prices and USD Index. During

recession US Dollar is considered a safe haven, people around the world tend to

disinvest in commodities and invest into US Dollar. From our analysis, we canclearly see that the prices of precious metals such as silver, palladium, titanium, etc.

declines during recessionary periods. The above trend clearly suggests that silver can

be used only as a long term hedge against inflation, but it cannot be used in short

term as a recessionary hedge.

Oil Prices

Historically oil has shown a strong correlation with gold. Gold and silver also seem

to have a stable relationship. Based on this it might be logical to conclude that oil

and silver should also have a stable relationship. It has been argued that the mining

of silver is an energy intensive process and hence as the oil prices rise or fall, the

prices of silver would also rise or fall. This however would be over simplification as

it undermines various other important factors. There is also another argument that

says that silver and oil should have greater correlation than silver and gold as they

are industrial elements and the factors affecting their demands would be common.However, contrary to this silver is not a perishable commodity whereas oil is.

Since the 1960s silver and oil have had a 0.7 positive correlation10, this is quite

strong but not as strong as of gold and oil that have a correlation of 0.8. Our analysis

of the silver and oil relationship shows that silver does have a positive correlation

with oil during secular commodities bull periods and the secular bear periods.

Stock Indices

There is certainly some interplay between the fortunes of the stock markets and

capital flowing into silver. Silvers appeal as an alternative asset is defin itely higher


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when traditional investments are not faring well11. Yet, the relationship between

silver and the S&P 500 (SPX) is far more nuanced and complex than merely a direct

inverse or even parallel relationship. The SPX is not, and never has been, silvers

primary driver.

Running regression across top indices such as S&P 500, Dow Jones, BSE and NSE

we see a common pattern emerging. The correlation between silver and the stock

markets was low pre-recession. But we see that during the subprime crisis and post

it, silver has been highly correlated with the stock markets. This shows the returning

demand for investment in silver with the growing confidence in the markets.

Regulation in Silver Market

In response to various complaints from investors in recent past, CFTC has closely

studied the existing controls in the market to prevent manipulation12. However,

there is no evidence of attempted manipulation as claimed by the complainants. The

clear outperformance demonstrated by silver prices when compared to other

precious metals in the recent years, shows that silver prices are not artificiallydepressed. The NYMEX price also trades close to the spot price thus showing that

close movements are an indicator of healthy market forces in play.

Moreover, there is a slightly positive relationship between the short futures price and

spot silver price, which suggests that larger short futures positions are associated

with higher prices. However, still many industry experts believe that the silver

market is largely controlled by only a few. These investors are suspected to haveenough power to corner the market if they wish to.


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3 Ways in which silver and gold can be invested

Top 3 Ways to Invest in Gold and Silver

There are a variety of ways to gain exposure to the precious metals market as a do-it-

yourself investor.

Knowing the ins and outs of each investment vehicle can be challenging to sort out.

Heres my take on the top 3 ways that most investors use in order to invest in gold

and silver.

They are:

buying stock in market leading gold and silver producers,

getting a broad piece of the market with ETFs, and

picking up gold and silver bullion/coins.

Each investment vehicle has its pros and cons. So lets delve into what might suit

you the best.

1. Mining Stocks

Investing in mining stocks

One of the most lucrative ways to profit from a precious metals commodity bull

market like the one we experienced in the last decade is to buy shares in the

companies that mine gold and silver.

As in any investment opportunity, take the time to analyze the fundamentals of those

mining companies that hold promise for your investment portfolio.


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Although requiring a little more work on your part in doing some preliminary due

diligence, its worth it.

A good investment buddy of mine spends upwards of $1000 per year on subscription

newsletters geared towards the do-it-yourself investor.

Initially, as a novice investor I thought he was crazy to invest so much money in

such a service.

That was until he told me what his return was as a result of having solid information

from which to base his investment decisions.

His in-depth look into gold and silver producers gave him an edge in the market.

For the up and coming investor, you too can develop your edge by checking the

growth rates of various fundamental indicators that are going to help you in your

decision-making process.

What to look for?

Look for miners with a track record of profitability over a five to seven year period

as evidenced by consistent growth rates in excess of 7 percent and preferably 10

percent for Return on Investment Capital (ROIC), Book Value Per Share (BVPS),Earnings Per Share (EPS), Sales and Free Cash Flow.

Those miners that show consistent growth over long periods of time are more likely

to continue to be profitable for the shareholders.

To build a balanced portfolio, focus on mining companies with low-cost production,

diversification and solid fundamentals.

Also include a couple of dividend-paying majors where possible. Its nice to have an

additional stream of cash coming into your brokerage account to do with as you see

fit.

Heres an example of a reasonably-balanced precious metal stock portfolio that my

buddy shared with me during the last precious metals bull market.


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It blends major producers with mid-tier or junior producers:

Goldcorp

Newmont IAMGOLD Yamana Royal Gold

2. Exchange-Traded Funds (ETFs)

An ETF is an investment vehicle that combines the features of traditional mutual

funds and individual stocks.

These open-ended funds trade like stocks that can be bought and sold on a stock

exchange.

Precious metal ETFs are designed to track the price of gold or silver, less the storage

and administration costs. They are backed, in many cases by physical allocated

metal.

The main advantage is that you, the retail investor, as well as large institutions such

as pension funds, now have access to investing directly in gold and silver by owning

shares, which are both liquid and economical.

You also enjoy the protection offered by a regulated financial institution.

The downside is that some funds are not backed by the physical allocation of gold or

silver.

Before investing in any ETF, ensure that you understand what the investment

vehicle is actually promising to deliver.

Does the ETF actually track the price of the precious metal or is it based on an

investment similar to an investment in that metal?


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To find out, check out online the disclosure statements filed with the Security

Exchange Commission.

Three of the largest physical gold-backed exchange-traded funds are:

1 Ishares Comex

2 SPDR Gold Shares

3 GBS UK

3. Gold & Silver Bullion & Coins


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Owning physical gold and silver makes the investment very private and outside of

the financial system.

Having physical precious metals in your possession gives you that added assurance

against catastrophic situations, such as a complete collapse of the financial system.

The downside of owning physical gold or silver is that you need a safe storage

facility and insurance protection, whether it is stored at home or abroad.

Your best bet is to purchase the most recognizable forms of gold or silver such as 1-ounce U.S. Gold Eagles (Canadian Maples) or 100-ounce bars of 0.999 fine silver.

Take the time to find a trustworthy local dealer that provides you with both advice

and great service.

Conclusion

For us, gold and silver are the most complicated assets to price. Stocks, currencies

and other commodities mostly depend on fundamental data of the stock, the country


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or on physical demand and supply of the commodity. Once fundamental data about

the asset comes out, even an inexperienced investor can understand most price

movements. Pricing gold or silver on a fundamental basis is far more difficult

because prices depend on the valuation of other assets and on differences betweenU.S. data and the rest of the world. We think that gold and silver are valued

somehow indirectly, it is a relative valuation and describe a delta between the

US and the rest of the world. This makes trends driven by fundamentals very

difficult to understand. Maybe therefore, gold and silver are far more subject to

love it or hate it. Many analysts base their arguments to buy on real interest rates.

Since these bulls do not get the fundamentals right, they got caught on the wrong

foot and consequently they speak about conspiracy theories and market manipulation

when the gold price falls. Many opponents, however, argue ingeniously that goldbrings no income, but has only a cost of carry.

WEBIOLOGRAPHY


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Exotic Investment

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