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AGood Deliverybar, the standard for trade in the major international gold markets.

Size of a 100 gram gold bar, size compared to a playing card. The plastic package is not to be opened. If opened, the bar may have to be re-melted after selling it back, which affects its value a little. Thickness is around 3-4 mm only. It is notably heavier than one might expect for such a small piece of metal.

Of all theprecious metalsgoldis the most popular as aninvestment.1Investors generally buy gold as a way of diversifying risk, especially through the use offutures contractsandderivatives. The gold market is subject tospeculationand volatility as are other markets. Compared to other precious metals used for investment, gold has the most effective safe haven and hedging properties across a number of countries.2

Gold prices (US$ per troy ounce), in nominal US$ and inflation adjusted US$ from 1914 onward.

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. The notable peak in 1980 followed theSoviet Unionmilitary involvement inAfghanistan, and can possibly be interpreted as a fear for a World War

Gold has been used throughout history asmoneyand has been a relative standard for currency equivalents specific to economic regions or countries, until recent times. Many European countries implementedgold standardsin the latter part of the 19th century until these were temporarily suspended in the financial crises involvingWorld War I.3AfterWorld War II, theBretton Woods systempegged the United States dollar to gold at a rate of US$35 pertroy ounce. The system existed until the 1971Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold and made the transition to afiat currencysystem. The last major currency to be divorced from gold was theSwiss Francin 2000.4

Since 1919 the most common benchmark for the price of gold has been theLondon gold fixing, a twice-daily telephone meeting of representatives from fivebullion-trading firms of theLondon bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-dayspot price, derived fromover-the-countergold-trading markets around the world (codeXAU). The following table sets out the gold price versus various assets and key statistics at five-year intervals.5

ozt6DJIAWorld GDPUS DebtDebt per capitaTrade-weighted

Like most commodities, the price of gold is driven bysupply and demand, including speculative demand. However, unlike most other commodities, saving and disposal play larger roles in affecting its price than itsconsumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewelry, with little value over itsfine weight so it is nearly as liquid as bullion, and can come back onto the gold market.1213At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 long tons; 174,000 short tons).14The investorWarren Buffetthas said that the total amount of gold in the world that is above ground could fit into a cube with sides of just 20 metres (66ft)15(which is roughly consistent with 158,000 tonnes based on a specific gravity of 19.3). However, estimates for the amount of gold that exists today vary significantly and some have suggested the cube could be a lot smaller or whom?

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, which affects market supply and demand equally, rather than on changes in annual production.16According to theWorld Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.17About 2,000 tonnes goes into jewelry, industrial and dental production, and around 500 tonnes goes to retail investors and exchange-traded gold funds.17

Central banks and theInternational Monetary Fundplay an important role in the gold price. At the end of 2004,central banksand official organizations held 19% of all above-ground gold asofficial gold reserves.18The ten-yearWashington Agreement on Gold(WAG), which dates from September 1999, limited gold sales by its members (Europe, United States, Japan, Australia, theBank for International Settlementsand the International Monetary Fund) to less than 500 tonnes a year.19In 2009, this agreement was extended for a further five years, but with a smaller annual sales limit of 400 tonnes.20European central banks, such as theBank of Englandand theSwiss National Bank, have been key sellers of gold over this period.21

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 2005.22In early 2006,China, which only holds 1.3% of its reserves in gold,23announced 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. Chinese investors began pursuing investment in gold as an alternative to investment in the Euro after the beginning of the Eurozone crisis in 2011. China has since become the worlds top gold consumer as of 2013update.24

It is generally accepted that the price of gold is closely related to interest rates. As interest rates rise, the general tendency is for the gold price, which earns no interest, to fall, and vice versa. As a result, the gold price can be closely correlated to central banksclarification neededvia their monetary policy decisions on interest rates. For example, if market signals indicate the possibility of prolonged inflation, central banks may decide to raise interest rates, which could reduce the price of gold. But this does not always happen: after the European Central Bank raised its interest rate slightly on April 7, 2011, for the first time since 2008,25the price of gold drove higher, and hit a new high one day later.26Similarly, in August 2011 when interest rates in India were at their highest in two years, the gold prices peaked as well.27

The price of gold can be influenced by a number of macroeconomic variables.28Such variables include the price of oil, the use ofquantitative easing, currency exchange rate movements and returns on equity markets.28

Gold, like all precious metals, may be used as ahedgeagainstinflationdeflationor currencydevaluation, though its efficacy as such has been questioned; historically, it has not proven itself reliable as a hedging instrument.31A unique feature of gold is that it has no default risk.32As 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 are under severe pressure because of massive governmentdeficits. The more money that is pumped into these economies the printing of money basically then the less valuable the currencies become.33

Deutsche Banks view of the point at which gold prices can be considered close to fair value (on 10 October 2014)34

Jewelryconsistently accounts for over two-thirds of annual gold demand. India is the largest consumer in volume terms, accounting for 27% of demand in 2009, followed by China and the USA.35

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 have fluctuated over the past few years due to the steady expansion in emerging markets of middle classes aspiring to Western lifestyles, offset by thefinancial crisis of 20072010.36

In recent years the recycling of second-hand jewelry has become a multibillion-dollar industry. The term Cash for Gold refers to offers of cash for selling old, broken, or mismatched gold jewelry to local and online gold buyers. There are many websites that offer these services.

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.37

When dollars were fully convertible into gold via thegold standard, both were regarded as money. However, most people preferred to carry around paperbanknotesrather than the somewhat heavier and less divisiblegold coins. If people feared their bank would fail, abank runmight result. This happened in the USA during theGreat Depressionof the 1930s, leadingPresident Rooseveltto impose anational emergencyand issueExecutive Order 6102outlawing 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 judgeJohn M. Woolsey, on the technical grounds that the order was signed by the President, not the Secretary of the Treasury as required.38

The most traditional way of investing in gold is by buying bulliongold bars. In some countries, likeCanadaAustriaLiechtensteinandSwitzerland, 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 Deliverybars are approximately 400 troy ounces (12kg).391 kilogram (32.2ozt) bars are also popular, although many other weights exist, such as the 10ozt (11oz; 311g), 1ozt (1.1oz; 31g), 10g, 100g, 1kg, 1Tael,clarification neededand 1Tola(11.3g).

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 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 atungsten-filled cavity, which may not be revealed by an assay. Tungsten is ideal for this purpose because it is much less expensive than gold, but has the same density (19.3 g/cm³).

Good delivery barsthat are held within theLondon 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 LBMAs Good Delivery Rules.40

The LBMA traceable chain of custody includes refiners as well as vaults. Both have 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.41However 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 examplein the US in the 1930s gold was seized by the governmentand legal moving was banned.42

Efforts to combat gold bar counterfeiting includekinebarswhich employ a unique holographic technology and are manufactured by the Argor-Heraeus refinery in Switzerland.

Gold coinsare a common way of owning gold.Bullion coinsare priced according to theirfine weight, plus a small premium based onsupply and demand(as opposed tonumismaticgold coins, which are priced mainly by supply and demand based on rarity and condition).

The sizes of bullion coins range from one-tenth of anounceto two ounces, with the one-ounce size being most popular and readily available.citation needed

TheKrugerrandis the most widely held gold bullion coin, with 46million troy ounces (1,400 tonnes) in circulation. Other common gold bullion coins include theAustralian Gold Nugget(Kangaroo), Austrian Philharmoniker (Philharmonic),Austrian 100 CoronaCanadian Gold Maple LeafChinese Gold PandaMalaysian Kijang EmasFrench Napoleonor Louis dOr,Mexican Gold 50 PesoBritish SovereignAmerican Gold Eagle, andAmerican Buffalo.

Coins may be purchased from a variety of dealers both large and small. Fake gold coins are common and are usually made of gold-layered alloys.43

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Gold roundslook like gold coins, but they have nocurrencyvalue.4445They range in similar sizes asgold coins, including 0.05troy ounce, 1 troy ounce, and larger. Unlike gold coins, gold rounds commonly have no additional metals added to them for durability purposes and do not have to be made by a governmentmint, which allows the gold rounds to have a lower overhead price as compared to gold coins. On the other hand, gold rounds are normally not as collectible as gold coins.

Gold exchange-traded productsmay includeexchange-traded funds(ETFs),exchange-traded notes(ETNs), andclosed-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 theAustralian Stock Exchange, and originally represented exactly 0.1 troy ounces (3.1g) of gold. As of November2010update,SPDR Gold Sharesis the second-largest exchange-traded fund in the world bymarket capitalization.46

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 that 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 withmortgage-backed securities, due to features of its complex structure.4748495051

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 orunit investment trusts(UITs), but that differ from traditional open-end companies and UITs.52The 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 ETFs portfolio. Usually, the Creation Units are split up and re-sold on a secondary market.

ETF shares can be sold in two ways: Theinvestorscan 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 themselvesmutual funds.52

Gold certificatesallow gold investors to avoid therisksand costs associated with the transfer and storage of physical bullion (such as theft, largebid-offer spread, andmetallurgical assaycosts) by taking on a different set of risks and costs associated with the certificate itself (such as commissions, storage fees, and various types ofcredit risk).

Banks may issue gold certificates for gold that isallocated(fully reserved) orunallocated(pooled). Unallocated gold certificates are a form offractional reserve bankingand do not guarantee an equal exchange for metal in the event of arunon the issuing banks 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.53

The first paper bank notes weregold certificates. They were first issued in the 17th century when they were used by goldsmiths inEnglandand theNetherlandsfor 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. On April 5, 1933, the US Governmentrestricted the private gold ownership in the United Statesand 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 inAustraliaand the United States, as well as by banks inGermanySwitzerlandandVietnam.54

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 offractional reserve bankingand do not guarantee an equal exchange for metal in the event of arunon the issuers gold on deposit. Another major difference is the strength of the account holders claim on the gold, in the event that the account administrator faces gold-denominatedliabilities(due to ashortorin gold for example),asset forfeiture, orbankruptcy.

Many banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency on afractional reservebasis.citation neededSwiss banksoffer 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 currencysystems 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 abailmenton 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.citation neededThese 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 goldoffers private individuals 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, such as goldforwardsfuturesandoptions, currently trade on various exchanges around the world andover-the-counter(OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX) andEuronext.liffe. InIndia, gold futures are traded on theNational Commodity and Derivatives Exchange(NCDEX) andMulti Commodity Exchange(MCX).55

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 daily reports 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.56

Outside the US, a number of firms provide trading on the price of gold viacontract for differences(CFDs) or allowspread betson the price of gold.

Instead of buying gold itself, investors can buy the companies that produce the gold assharesingold 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 asfloodingsubsidenceandstructural 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 as even higher risk and even more volatile. This additional volatility is due to the inherentleveragein theminingsector. 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 minesprofit marginwill be $300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360, which represents a 20% increase in the mines 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 price to $540 will decrease that margin to $240, which represents a 20% fall in the mines profitability, and possibly a 20% decrease in the share price.

To reduce this volatility, some gold mining companieshedgethe 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.

Investors usingfundamental analysisanalyze themacroeconomicsituation, which includes internationaleconomic indicators, such asGDPgrowth rates,inflationinterest ratesproductivityand energy prices. They would also analyze the yearly global gold supply versus demand.

The performance of gold bullion is often compared tostocksas different investment vehicles. 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.57This appreciation 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.58The gold price peak of 1980 also coincided with theSoviet Unions invasion of Afghanistanand the threat of the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and has fallen sharply since.

One argument follows that in the long-term, golds high volatility when compared to stocks and bonds, means that gold does not hold its value compared to stocks and bonds:59

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 in real terms. Meanwhile, a dollar invested in gold in 1801 would by 1998 be worth just 78 cents.

Investors may choose toleveragetheir position by borrowing money against their existing assets and then purchasing or selling gold on account with the loaned funds. Leverage is also an integral part of trading goldderivativesandunhedgedgold mining company shares (seegold mining companies). Leverage or derivatives may increase investment gains but also increases the corresponding risk of capital loss if the trend reverses.

Some of the economic mechanics of gold have been compared to those ofcryptocurrencies. For example, they are bothscarcefungibleand do not come attached todebtNick Szabocreated a digital currency call bit gold that mimicked some features of gold.60

Gold maintains a special position in the market with manytaxregimes. For example, in theEuropean Unionthe trading of recognised gold coins and bullion products are free ofVATSilverand other precious metals or commodities do not have the same allowance. Other taxes such ascapital gains taxmay also apply for individuals depending on theirtax residency. U.S. citizens may be taxed on their gold profits at collectibles or capital gains rates, depending on the investment vehicle used.61

Gold attracts a fair share of fraudulent activity. Some of the most common to be aware of are:

Cash for gold With the rise in the value of gold due to the financial crisis of 20072010, there has been a surge in companies that will buy personal gold in exchange for cash, or sell investments in gold bullion and coins. Several of these have prolific marketing plans and high value spokesmen, such as prior vice presidents. Many of these companies are under investigation for a variety ofsecurities fraudclaims, as well aslaundering moneyforterrorist organizations.

Also, given that ownership is often not verified, many companies are considered to be receiving stolen property, and multiple laws are under consideration as methods to curtail this.

High-yield investment programs HYIPs are usually just dressed uppyramid schemes, with no real value underneath. Using gold in their prospectus makes them seem more solid and trustworthy.

Advance fee fraud Various emails circulate on the Internet for buyers or sellers of up to 10,000 metric tonnes of gold (an amount greater than US Federal Reserve holdings). Through the use of fake legalistic phrases, such as Swiss Procedure or FCO (Full Corporate Offer), naive middlemen are drafted as hopeful brokers. The end-game of these scams varies, with some attempting to extract a small validation amount from the innocent buyer/seller (in hopes of hitting the big deal),

and others focused on draining the bank accounts of their targeted dupes.

Gold dust sellers This scam persuades an investor to purchase a trial quantity of real gold, then eventually deliversbrassfilings or similar.

Shares in fraudulent mining companies with no gold reserves, or potential of finding gold. For example, theBre-Xscandal in 1997.

There have been instances of fraud when the seller keeps possession of the gold.

In the early 1980s, when gold prices were high, two major frauds wereInternational Gold Bullion Exchangeand Bullion Reserve of North America.

More recently, the fraud ate-Bullionresulted in a loss for investors.

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