A Guide to Investing in Gold · A Guide to Investing in Gold. Gold HISTORIC ROLE OF GOLD 2 GOLD SUPPLY 3 GOLD DEMAND 5 THE PRICE OF GOLD 6 WHY INVEST IN GOLD 6 Long-Term Store of

A Guide toInvesting in

Gold

GoldHISTORIC ROLE OF GOLD 2

GOLD SUPPLY 3

GOLD DEMAND 5

THE PRICE OF GOLD 6

WHY INVEST IN GOLD 6

Long-Term Store of Value 6

Asset of Last Resort 8

Highly Liquid 8

Asset Diversifier 9

WHEN AND WHERE TO BUY GOLD BULLION 11

INVESTMENT FORMS 12

Gold Bullion 12

Gold Bullion Coins 13

Delivery or Storage 14

OTHER GOLD-RELATED INVESTMENTS 16

Numismatic Coins 16

Gold Futures Contracts 16

Gold Options 17

Gold Mining Stocks 17

GLOSSARY OF GOLDAND INVESTMENT TERMS 18

A Guide toInvesting in

Gold’s unique physical properties, its luster, easyworkability, and virtual indestructibility havegiven it a special place in the history of the world.Over centuries, gold has been prized for its rarityand beauty. One of the earliest records of goldused as money dates from 560 BC, when KingCroesus of Lydia, today’s western Turkey, createda coin emblazoned with his own image. Beforecoinage, many commodities were used as a medi-um of exchange — cattle, cocoa beans, shellsand hides, to name but a few. As the idea of theguaranteed gold coin gained gradual acceptance,gold became the formalized basis of economic life.

Like ancient cultures, our modern society stillrecognizes the value and beauty of gold. Goldjewelry continues to adorn us; gold is used as an industrial metal in electronics, dentistry andother applications as well as an investment vehicle in the form of coins andbars. Gold is an internationally recognized monetaryand financial asset. Significantly, governmentshold one quarter of all the gold in existence.

HISTORIC ROLE OF GOLD

Gold’s unique physical properties, its luster, easyworkability, and virtual indestructibility havegiven it a special place in the history of the world.Over centuries, gold has been prized for its rarityand beauty. One of the earliest records of goldused as money dates from 560 BC, when KingCroesus of Lydia, today’s western Turkey, createda coin emblazoned with his own image. Beforecoinage, many commodities were used as a medi-um of exchange — cattle, cocoa beans, shellsand hides, to name but a few. As the idea of theguaranteed gold coin gained gradual acceptance,gold became the formalized basis of economic life.

Like ancient cultures, our modern society stillrecognizes the value and beauty of gold. Goldjewelry continues to adorn us; gold is used as an industrial metal in electronics, dentistry and

other applications as well asan investment vehicle in the form of coins and bars.

Gold is an internationally recognized

monetary and financial asset.Significantly, governments hold one quarter of all the gold in existence.

• 3 •

The supply of gold is limited by nature itself: thou-sands of pounds of ore are required to produce just one precious ounce. Gold is so scarce that allthe gold that has ever been mined (approximately135,000 metric tons) would fit into a cube measur-ing just 20 yards on each side.

What’s more, the amount of new gold mined eachyear is relatively small despite the use of advancedmining technology. New supplies generally add lessthan 2% per year to the world’s total stock of gold.Around three quarters of annual mine productioncomes from the top ten gold-producing nations.

Top Ten Gold-Producing Countries1. SOUTH AFRICA

2. UNITED STATES

3. AUSTRALIA

4. CANADA

5. CHINA

6. INDONESIA

7. RUSSIA

8. PERU

9. UZBEKISTAN

10. GHANA

Source: Gold Fields Mineral Services, 1999

There are four major components which make upthe available supply of gold each year: 1) new mineproduction; 2) reclaimed scrap, or gold reclaimedfrom jewelry and other industries such as electronicsand dentistry; 3) official, or central-bank sales; and 4)gold loans made to the market from official gold re-serves for borrowing and lending purposes (chart 1).

GOLD SUPPLY

The past decade has seen an increase in gold’s market liquidity as a result of the increase in goldloaned by central banks. It is the availability ofthis metal that permits a whole range of deriva-tive transactions to be efficiently carried out byvarious participants in the gold market such asfabricators, refiners, gold mining companies, andhedge funds. The bulk of the gold lent to themarket has been transformed into fabricatedproducts. The availability of this supply is highlysensitive to the perception about the future priceof gold by hedgers, investors and speculators.

Finally, the world’s central banks and officialinstitutions can also be net sellers of gold. World official sector activity is a dynamic processthat combines both purchases and sales of gold. Over the long term, official sector reserves haveremained remarkably stable. In the past 10 years,official sales have accounted for an average of 9% of the total annual supply of gold.

Reasons for reducing a nation’s official goldreserves range from distress selling to portfolioreallocation of a nation’s reserve assets. On certainoccasions, the gold used for minting legal tendercoins has been obtained from official reserves.

• 4 •

Official sector9%

Gold loans10%

Old gold scrap16%

Mine production65%

GOLD SUPPLY

Average annual supply (1989–1998)

SOURCE:

Gold Fields Mineral Services, 1999

Chart 1

There are three major sources of demand for gold:(1) jewelry fabrication; (2) industrial applications;and (3) investors (Chart 2). The largest source ofdemand is the jewelry industry. Gold’s workabili-ty, unique beauty and universal appeal make thisrare precious metal the favorite of jewelers allover the world. In recent years, demand from thejewelry industry alone has exceeded global mineproduction. This shortfall has been bridged bysupplies from scrap, official sector sales as well asthe release of gold into the market by various par-ticipants for the purposes of gold borrowing.

Besides jewelry, gold is used in a variety ofindustries including aerospace, medicine, elec-tronics and dentistry. The electronics industryneeds gold for the manufacture of computers,telephones, televisions and other equipment.Gold’s unique properties provide superior electri-cal conducting qualities and corrosion resistance.In dentistry, gold alloys are popular because theyare highly resistant to corrosion and tarnish.

Finally, there are investors, hedgers and specula-tors. Depending upon market circumstances, theinvestment component of demand can vary sub-stantially from year to year.

Industrial14%

Investment10%

Jewelry76%

GOLD DEMAND

Average annual demand (1989–1998)

SOURCE:

Gold Fields Mineral Services, 1999

• 5 •

GOLD DEMAND

Chart 2

The gold market is highly efficient. Fiveinternational trading centers — New York,London, Zurich, Tokyo and Hong Kong —provide continuous trading, 24 hours a day.For historical reasons, the world looks toLondon for price leadership. There prices areset twice daily at the “London Fix,” a biddingprocedure carried out by five of the world’slargest gold dealers.

Gold’s price performance is reported everyday in major newspapers around the worldalong with prices for stocks, bonds, mutualfunds, commodity futures and options.

The reasons for investing in gold haveremained much the same over history:• LONG-TERM STORE OF VALUE

• ASSET OF LAST RESORT

• HIGHLY LIQUID

• ASSET DIVERSIFIER

LONG-TERM STORE OF VALUE

Gold has acted as a reliable “store of value”because it fulfills the functions of money:

• It is portable and divisible. Its weight is agood measurement of a unit of value.

• It is indestructible, relatively scarce, andcannot be “manufactured”.

• It is easily recognizable and acceptable as aform of payment.

• 6 •

THE PRICE OF GOLD

WHY INVEST IN GOLD

Through both hard times and times of plenty,gold endures. Market cycles are permanentfacts of life but gold has maintained its long-term value. In contrast, most currencies(including the U.S. dollar) and industrial commodities have generally declined. This iswhy gold is often purchased as a hedge againstinflation and currency fluctuations. And whyso many investors around the world see goldas the “ultimate asset” — an important andsecure part of their investment portfolio.

Chart 3 demonstrates that gold has kept up withthe US inflation rate over the past 200 years.

In other words, the value of gold — what itcan buy in real goods and services — hasremained remarkably stable over time. Forexample, a man’s suit in sixteenth century

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$0.10

$1.00

$10.00

$100.00

1798

1808

1818

1828

1838

1848

1858

1868

1878

1888

1898

1908

1918

1928

1938

1948

1958

1968

1978

1988

1998V

alue

of

$1 I

nves

ted

1798

GOLDINFLATION

THE VALUE OF GOLD HAS REMAINEDREMARKABLY STABLE OVER TIME

200 YEARS OF GOLD VS. INFLATION

Chart 3

England at the time of King Henry VIII costthe equivalent of one ounce of gold, roughlythe same as a suit would cost today.

ASSET OF LAST RESORT

Gold is known as the “asset of last resort”.Throughout history, national currencies havecome and gone but gold has remained remark-ably stable. Gold is an asset which does notdepend upon any government’s or corpora-tion’s promise to repay. It is not directlyaffected by the economic policies of any indi-vidual country and it cannot be repudiated orfrozen as in the case of paper assets. Forthese reasons, one quarter of all the gold inexistence is held by governments, centralbanks and other official institutions as part oftheir international monetary reserves. Thereis nothing to suggest that gold’s reliability as along-term store of value will change in thefuture, despite there being from time to time amore attractive “money” safehaven such as theU.S. dollar, for example, or the Swiss Franc.

HIGHLY LIQUID

Gold is among the most liquid of the world’sassets. It can be readily sold 24-hours a dayin one or more markets around the world.This cannot be said of most investments,including stocks of the world’s largest corpo-rations. In addition, the trading spreads onbullion are comparable to those on stocks and bonds (which are considered to be liquidassets). Finally, it takes about the sameamount of time to execute a trade in gold as it does for stocks and bonds.

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ASSET DIVERSIFIER

Whether your investment approach is conser-vative or aggressive, gold can play a vital rolein diversifying your portfolio. For this reason,many experts urge investors to keep a portionof their total assets in gold. Since most port-folios are invested primarily in traditionalfinancial assets such as stocks and bonds,adding gold to a portfolio introduces anentirely different asset. The purpose of diver-sification is to protect the total portfolioagainst fluctuations in the value of any oneasset class. Gold does exactly that.

Gold’s ability to serve as a diversifier isdue to its low-to-negative correlation withstocks and bonds.The economic forcesthat determine the priceof gold are different from, and in many casesopposed to, the forces which determine theprices of most financial assets. For example,the price of a stock depends on the earningsand growth potential of the company it repre-sents. Likewise, the price of a bond dependson its safety, its yield, and the yields of compet-ing fixed income investments. The price ofgold, however depends on different factorsincluding the supply and demand for gold, thestatus of the U.S. dollar, the state of inflationand interest rates. While the effect of these fac-tors on the gold price are somewhat complex,the important point to remember is that they

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cause the price of gold to move independentlyof the prices of other assets in a portfolio.

Gold is the only asset that is negatively correlatedwith other asset classes as demonstrated inChart 4 above. Therefore, its price generallymoves in the opposite direction from otherasset classes such as U.S. stocks, Treasurybills, and bonds.

Due to its negative correlation to other assetclasses, gold can reduce portfolio volatility orrisk. Chart 5 illustrates how a negatively-cor-related asset (like gold) can lower portfoliovolatility or risk. In this example, a new assetis added to a portfolio with a risk level of 10%(as measured by standard deviation) toamount for 10% of its total value. The morenegative the correlation between the new assetand the pre-existing portfolio, the lower theoverall level of volatility will be for the newportfolio. For example, if the new asset is per-fectly correlated with the pre-existing portfo-lio (that is, the correlation is 100), then addingany amount of the new asset will not changethe level of portfolio risk. However, if the new

• 10 •

-50 0 50 100 150

Gold

U.S. Stocks-23

Small Cap. Stocks-12

Real Estate-18

Bonds-16

T. Bills-8

Int’l. Stocks-8

Correlation with Gold (x100)

GOLD IS NEGATIVELY CORRELATED

TO OTHER ASSET CLASSES

Chart 4

asset has a correlation of less than 100, (say50), it reduces portfolio risk slightly to a levelof 9.6%. If the new asset has a correlation of0, then the portfolio’s risk is reduced modestlyto a level of 9.2%. Finally, if the correlation ofthe new asset has a correlation of -50 (similarto gold’s correlation with U.S. equities), thenportfolio risk is reduced significantly, to alevel of 8.8%.

Gold can benefit you as an investor in a num-ber of ways. Gold is a long-term store ofvalue, as well as a highly-liquid, international-ly-recognized asset of last resort. It can diver-sify (and thus stabilize) your portfolio, offer-ing protection against market fluctuations.Gold is also easy to buy and sell, any time,anywhere in the world.

“Is now the right time to buy?” With gold,the answer is always the same: “yes”. Gold is

• 11 •

10.0%

9.6%

9.2%

8.8%

HOW A NEGATIVELY-CORRELATED ASSET (LIKE GOLD) REDUCES PORTFOLIO RISK

Correlation of New Asset with Portfolio (x100)

Tota

l Po

rtfo

lio R

isk

(sta

ndar

d de

viat

ion

%)

100

8.8

8.5

9.0

9.3

9.5

9.8

10.0

10.3

75 50 25 0 -25 -50

no risk reduction

significantrisk reduction

Chart 5

WHEN AND WHERE TO BUY BULLION

an investment for the long run. The right timeto buy gold is when you understand what it isand what it can do for your portfolio.

Gold bullion is available through preciousmetals and coin dealers, selected brokeragefirms and banks throughout the U.S. As withany investment, it is always advisable to checkthe terms of the purchase agreement, proce-dures and prices offered by the dealer.Prospective investors should consult theirfinancial advisor regarding tax laws or othercircumstances.

GOLD BULLION

International refiners make it convenient forinvestors to own bullion by offering gold barsin a variety of weights and sizes, ranging fromone troy ounce to 400 troy ounces, the size ofan internationally-traded “London good deliv-ery” bar. (One troy ounce equals 1.09714 reg-ular, or avoirdupois ounces.)

Broker commissions on buying and sellinggold bars are minimal, and in most cases, pur-chasing bars is the most cost-efficient means

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INVESTMENT FORMS

of owning gold. Bars bearing the “hallmark”(logo) of internationally recognized refinersare the easiest to sell. These refiners “assay” or test the metal for its purity or fineness. The bars are generally stamped .995 (99.5%pure gold) or higher purity, along with theindividual bar’s weight. Gold bullion bars canbe purchased from selected commercial banks,brokerage houses, and precious metals dealers.

GOLD BULLION COINS

Gold bullion coins are popular with investorsbecause they combine intrinsic value withartistic beauty. The bullion coin represents aninvestment in pure gold, and because it is legaltender, its authenticity is guaranteed by thecountry of origin. The bullion coin bears aface value that is largely symbolic; its truevalue depends on its gold content and thedaily price of gold.

Bullion coins are minted in affordable weightssuch as 1⁄20, 1⁄10, 1⁄4, 1⁄2, and one ounce. Coinsmake valuable gifts. Bullion coins can be easi-ly bought and sold virtually anywhere in theworld. Prices for the most popular one-ouncecoins are quoted daily in most of the world’snewspapers. Prices for bullion coins arebased on the underlying price of gold bullion,plus a small premium of 4-8%. Some popularbullion coins include the American Eagle,Australian Kangaroo Nugget, the AustrianPhilharmonic, theCanadian Maple

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Leaf, and the South African Krugerrand.Banks and dealers make a market to buy andsell these bullion coins in much the same wayas they do for regular bullion.

YOUR CHOICES FOR OWNING GOLD — PHYSICAL DELIVERY OR STORAGE

You can choose the method of purchase andstorage that best meets your needs. Forinstance, you can take physical delivery(direct possession) and enjoy the security ofhaving your investment in your own hands.Or you can buy bullion through a storage pro-gram, in which case your broker, banker ordealer will use a secure, third-party depositoryto hold and protect your gold for a small fee.

Holding a gold storage account is an attractivealternative to purchasing physical metal. Inthe case of a gold storage account, an institu-tion such as a commercial bank or a preciousmetals dealer has the obligation to deliver upondemand by the investor, a stated quantity andfineness of gold in accordance with the issuer’sterms and conditions. Most companies that

• 14 •

offer this typeof investmentissue regularstatements thattrack the pur-chase and salesactivities oftheir investors’ holdings,similar to statementsissued by major brokerage firmswhen reporting on equity transactions.

An investment in a storage account isidentical to an investment in bullion. With agold storage account, however, the investordoes not have to pay fabrication charges forsmall quantities. Also, because the gold is storedat the issuing institution, there are no deliverycharges. Most institutions permit the investorto conduct transactions over the telephone.

Usually gold held in storage accounts is“pooled” with the gold of other investors in athird-party depository. This form of owner-ship is referred to as unallocated. Unallocatedownership is defined as a specific but undivid-ed interest in a gold bar. Delivery of the poolis guaranteed by the issuing institution. Unal-located purchases are a less expensive way forinvestors to own gold.

Allocated accounts assign a specific bar (or bullion coin), numbered and identified by hall-mark, weight and fineness to a particularinvestor.

• 15 •

NUMISMATIC COINS

Unlike bullion coinsthat are valued solelyon the basis of theirgold weight, thevalue of a numismaticgold coin is deter-

mined by several factors: its rarity, the

number of coins originallyminted, and the age and condition of the coin.Numismatic coins are bought and sold withinthe coin collecting community with littleregard for today’s gold price. Numismaticcoins are cherished for their beauty, historicalsignificance and their potential investmentvalue. Hence, numismatic coins sell at a signif-icant premium over their intrinsic gold content.

GOLD FUTURES CONTRACTS

Futures contracts are firm commitments tomake or take delivery of a specified quantityand quality of a commodity during a specificmonth in the future, at an agreed-upon price.Futures contracts are traded on regulatedcommodity exchanges, the two largest beingthe New York Mercantile Exchange COMEXDivision (New York), and TOCOM (Tokyo).Investors may take delivery of the “underlyingphysical” asset at the maturity of the futurescontract.

• 16 •

OTHER GOLD-RELATEDINVESTMENTS

Overall, the futures price is determined by themarket’s perception of what the “forward car-rying” costs for gold ought to be at any point intime. The main ingredient of the gold futuresprice is the contango, the interest cost for hold-ing gold, plus insurance and storage charges.

GOLD OPTIONS

An option gives the holder the right, but notthe obligation, to buy or sell gold at a pre-determined price by an agreed date, for whichprivilege the holder pays a premium.

Gold futures options are traded on regulatedcommodity exchanges such as The New YorkMercantile Exchange COMEX Division andthe Bolsa Mercadorias & de Futuros (BM&F)in Sao Paulo, Brazil.

GOLD MINING STOCKS

Buying a gold mining stock represents aninvestment in a corporation. The appreciationpotential of a gold mining stock is dependentnot only on market expectations of the futureprice of gold, but also on the future earningsand growth potential of the company. It istherefore important to be familiar with thecorporate health of the mining company youare purchasing.

• 17 •

ASSAY: To test a metal for purity.

BID/ASK: “Bid” or “buy” is the price a dealer is pre-pared to pay for gold bullion. “Ask” or “sell” is theprice offered by the seller. (See also definition of“Spread” below.)

BULLION: Refined gold that is at least 99.5% pure,usually in the form of bars, wafers or ingots.

BULLION COIN: A legal tender coin whose marketprice depends on its gold content, rather than its rari-ty or face value.

FACE VALUE: The nominal value given to legal ten-der coin or currency (for example a 1-oz. goldAmerican Eagle coin has a face value of $50).

FINE, FINENESS, FINE GOLD: The quantity ofpure gold contained in 1,000 parts of an alloy. A nor-mal “good delivery bar” of 0.995 fineness contains995 parts of gold and 5 parts of another metal. Goldis produced in bars up to a purity of 999.9 (oftenreferred to as “four nines”).

FUTURES CONTRACT: A firm commitment tomake or accept delivery of a specified quantity andquality of a commodity on a specific date in thefuture.

GOLD STANDARD: A monetary system based onconvertibility into gold; paper money backed andinterchangeable with gold.

GRAIN: One of the earliest weight units used formeasuring gold. One grain is equivalent to 0.0648grams.

HALLMARK: Mark, or marks, which indicate theproducer of a gold bar and its number, fineness, etc.

KARAT: Unit of fineness, scaled from one to 24. 24karat gold (or pure gold) has at least 999 parts puregold per thousand; 18-karat has 750 parts pure goldand 250 parts alloy, etc.

KILO BAR: A bar weighing one kilogram —approximately 32.1507 troy ounces.

• 18 •

GLOSSARY OF GOLD AND INVESTMENT TERMS

LEGAL TENDER: The coin or currency which thenational monetary authority declares to be universallyacceptable as a medium of exchange; acceptable forinstance in the discharge of debts.

LIQUIDITY: The quality possessed by a financialinstrument of being readily convertible into cashwithout significant loss of value.

LONDON FIX: The twice-daily bidding session inLondon of the five major gold traders, at which thegold price is fixed or set. The London Fix providesthe basis for many gold contracts worldwide.

NUMISMATIC: Coins that are valued for their rari-ty, condition and beauty beyond the intrinsic value oftheir gold content. Generally, premiums for numis-matic coins are higher than for bullion coins.

OPTION: The right, (not the obligation), to buy orsell a commodity or a financial security on a specifieddate in the future.

PENNYWEIGHT: An American unit of weight forgold. Twenty pennyweights equal one ounce.

PREMIUM: The amount by which the market valueof a gold coin exceeds the actual spot value of its goldcontent. Part of the premium is recovered by the sell-er at resale.

RESTRIKE: A modern replica of previously issuedcoins. Governments and their mints can choose to“restrike” a previous issue rather than introduce newcoinage.

SPOT PRICE: Sometimes referred to as the cashprice. The current price in the physical market forimmediate delivery of gold.

SPREAD: The difference between Bid (the price abuyer is prepared to pay for gold) and Ask (the pricea seller offers) prices.

TROY OUNCE: A unit of weight, equal to about 1.1avoirdupois (ordinary) ounces. The word ouncewhen applied to gold, refers to a troy ounce.

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The World Gold Council accepts no liability for any action taken byany company, firm or individual as a result of any statement, figureor representation in this brochure. Individuals considering direct orindirect investment in gold or any other financial instrument shouldconsult with and rely upon their professional investment advisors.