c
 



› › ›
           
 

 22

c 



1. Physical Risks of Gold Ownership

2. Gold Exchange Risks
3. Volatility of Gold
4. Political Risks
5. Scams

› › ›
           
 

 33

!  


1. Buying gold bars and coins exposes the

investor to the risk of loss and theft

› › ›
           
 

 44

!  


1. Costs are involved to limit this risk

2. The transport of gold needs to be
insured
3. Gold has to be kept in a personal safe at
home or, better
4. In the bank·s safety deposit box
5. Here, renting fees incur

› › ›
           
 

 55

!  


1. A bank vault is probably the safest place

for storing gold
2. However, investors should not believe
that the bank will store the precious
metal for generations

› › ›
           
 

 DD

!  


1. HSBC customers had to face this

situation
2. The bank asked end of 2009 its small
retail customers to remove their gold
from the banks· New York vault
3. This resulted in an armada of armored
cars, bringing gold out of New York

› › ›
           
 

   

!  


1. Another advantage of a bank safety

deposit box is that the gold is not
immediately available
2. As it can be only accessed during bank
hours

› › ›
           
 

 ··

!  


1. Another issue is the insurance limit

2. In Germany, for example, bank safety
deposit boxes are insured only until US$
28,000
3. With the current gold price, this
corresponds to 20 gold coins (each 1
ounce), or 567 gram

› › ›
           
 

 rr

!  


1. How secure are safety deposit boxes?

2. In the first quarter of 2010, thieves
removed in a bank in Paris the contents
of around 100 safety boxes
3. A couple of month later, in French Bank,
nearly 200 safety boxes were cracked
open and its contents stolen

› › ›
           
 

 1010

!  


1. Property insurance usually either has a

limited cover for loss of physical gold, or
does not cover it at all
2. In both places, additional coverage needs
to be purchased

› › ›
           
 

 1111

!  


1. Besides safety boxes and personal safes at

home, some people bury their gold on
their property (midnight gardening)
2. Will this reduce the risk of physical gold?
3. In some ways yes, as it reduces the
likelihood of theft
4. However, those people should make sure
to dig out the gold when they move (or
die)

› › ›
           
 

 1212

!  


1. Besides safety boxes and personal safes at

home, some people bury their gold on
their property (midnight gardening)
2. Will this reduce the risk of physical gold?
3. In some ways yes, as it reduces the
likelihood of theft
4. However, those people should make sure
to dig out the gold when they move (or
die)

› › ›
           
 

 1313




1. Exchange risks refer to the exchanges

where gold and futures are traded, and
not to currency risks
2. The two major gold futures exchanges
are the New York Mercantile Exchange
(NYMEX) and the Tokyo Commodity
Exchange (TOCOM)

› › ›
           
 

 1414




1. Trading at these and all other exchanges

is subject to their rules and regulations
2. The exchanges can on purpose or
accidentally foster market outcomes by
changing their trading rules

› › ›
           
 

 1515




What events can happen at an exchange?

› › ›
           
 

 1D1D




1. Margin Requirement Change

1. A margin requirement states how much
money needs to be available in the
futures account to be able to speculate on
future contracts
2. The higher the margin requirement, the
more money is needed to control the
same amount of the underlying asset

› › ›
           
 

 1 1 




1. If the margin in the margin account is

below the margin requirement, then the
investor either has to increase the margin,
or sell securities
2. Thus, rising the margin will in average
result in more selling and as a
consequence in price droppings

› › ›
           
 

 1·1·




1. In December 2009, COMEX raised the

margin requirements for gold (and silver)
contracts
2. It was speculated that this increase would
result in a bearish future gold market for
three to six months

› › ›
           
 

 1r1r




2. Liquidation only
1. Here, the exchange temporarily restricts
buying, thus driving the prices down
2. COMEX restricted silver buying in 1980,
when it reached an all-time high of US$
50
3. Will the exchange also declare a
´liquidation-onlyµ policy on gold, which
also trades for a record price?

› › ›
           
 

 20
20




3. Halt trading:
1. This event is the most extreme measure
2. Here, an exchange temporarily halts the
trading of a particular future contract

› › ›
           
 

 2121

¢ 
  

1. The price of gold, as of every traded

asset, is subject to the ups and downs of
the market
2. The rate of this precious metal can
fluctuate fundamentally
3. The volatility of gold must be a concern
to all short- and long-term investors

› › ›
           
 

 22
22

¢ 
  

› › ›
           
 

 23
23

¢ 
  

1. Gold·s value is shaped by demand and

supply
2. The factors are gold production by gold
mines, central banks, investors and the
industry (jewelry, electronic etc.)

› › ›
           
 

 24
24

¢ 
  

1. Thinking that it is possible to exactly

calculate and predict the gold price is
plainly wrong
2. There are many factors that influence the
price, but cannot be predicted
3. Such as the discovery of new gold
deposits, and natural disasters that
destroy gold mines

› › ›
           
 

 25
25

¢ 
  

Other factors that make the gold price

unpredictable and volatile:
1. The interplay of the international
financial system
2. Inflation and interest rates
3. Alternative investments
4. The irrationality of investors

› › ›
           
 

 2D
2D

¢ 
  

1. In average (especially since the beginning

of 2000) the gold price has risen
2. This is because of the increased demand
in emerging market (predictable),
3. Central banks that stepped up their
reserves gold reserves (partly predictably)
and the financial crisis which made gold a
more attractive investment (unpredicted
by most)

› › ›
           
 

 2 
2 

¢ 
  

1. The 10-year upward trend of the gold

price asks for caution
2. First, gold is now at an all-time high
3. Thus, investors who buy gold now do it
when the price is as high as never before.
Is this a wise move?

› › ›
           
 

 2·
2·

¢ 
  

1. Second, history tells us that the gold

price can fall, and stay down for extended
periods
2. If someone had bought gold in 1979,
3. that investor would have to wait for thirty
years until the gold price had reached the
same level, so that a sell would not result
in a loss (not considering inflation and
opportunity costs)

› › ›
           
 

 2r
2r

¢ 
  

1. Third, oil is in many respects similar to

gold:
2. both are popular commodities among
traders, both are finite resources,
extraction is costly and difficult to
replace
3. The recent history of the oil price should
be a warning of the volatility risk of this
commodity, and of all assets

› › ›
           
 

 30
30

¢ 
  

1. Oil stood in the beginning of 1999 at a

low of US$ 19 per barrel
2. In July 2008 oil was at US$ 147
3. Within one year the price fell to US$ 34
4. This is an unprecedented drop of 77 per
cent within just twelve month

› › ›
           
 

 3131

¢ 
  

1. Could this also happen to gold?

2. How to know when the gold price has
reached its peak?

› › ›
           
 

 32
32

¢ 
  

1. The volatility of gold is a market risk

2. Another market risk is the liquidity risk
3. This occurs in thinly traded markets,
where sellers have difficulties in finding
buyers
4. Futures of not actively traded contracts
might run into this risk
5. Shares of small stock mines might also
face liquidity problems

› › ›
           
 

 33
33

Ä 
  


1. The political risk of gold investing means

that the government can change laws and
regulations that may harm your
investment in gold
2. These government interventions can
happen in the country of the investor or
in another country
3. Both would have an impact on the gold
price

› › ›
           
 

 34
34

Ä 
  


First, prohibition of Gold Ownership

1. It is thinkable that the government
prohibits the possession of gold and
requires gold holders to sell their asset to
the government at a fixed price

› › ›
           
 

 35
35

Ä 
  


1. In 1934 Franklin D. Roosevelt passed a

law that made it illegal to possess gold
2. The only exception was gold for
industrial and artistic purposes
3. The price was fixed at US$ 20.67 for
which one ounce of gold had to be
exchanged

› › ›
           
 

 3D
3D

Ä 
  


1. The US congress passed this law to

prevent private gold to become a
competing currency
2. The possession of gold by private
citizens with only legalized 39 years later
in 1973 by the President Gerald Ford

› › ›
           
 

 3 
3 

Ä 
  


Second, nationalization of gold mines

1. Politicians could also nationalize gold
mines or heavily tax companies that
produce and trade in this precious metal

› › ›
           
 

 3·
3·

Ä 
  


1. In 2005 Chavez, the Venezuelan

president announced the confiscation of
the property held by Crystallex, a
Toronto-based gold-mining company
2. This resulted in a drop of its share price
by 50 per cent in a single day
3. Besides that, the dictator levied taxes on
many foreign companies

› › ›
           
 

 3r
3r

Ä 
  


hird, fixed gold price

1. The government could first, limit and
control gold trading by restricting the
amount of gold to be sold or by
determining a fixed price

› › ›
           
 

 40
40

Ä 
  


1. Before 1972 the gold price either directly

(classical gold standard) or indirectly
(Bretton Woods System) determined the
value, and the exchange rates of the
currencies of most Western Nations
2. Therefore, their governments determined
a fixed gold price

› › ›
           
 

 4141

Ä 
  


1. During this time, the gold rate was not

volatile which made trading and
speculating in this precious metal a futile
act
2. Even though currently the gold price
follows the law of the market, future
governments might reintroduce a fixed
gold rate so that the national currency
can be pegged to this metal

› › ›
           
 

 42
42

Ä 
  


1. Or the government might decide that

gold trades for a too high rate
2. The US Commodities Futures
Commission already has the authority to
dictate a trading halt for futures
3. This might be used on gold futures

› › ›
           
 

 43
43

Ä 
  


How to anticipate and circumvent these

government risks?
1. First, an investment in gold mines should
occur only in stable countries, such as
Canada and Australia (unless high risk
investments are desired)

› › ›
           
 

 44
44

Ä 
  


1. Second, it might be wise to distribute

personal gold reserves to several
countries, in case of confiscation
2. Third, investors should always be well-
informed about world news which can
influence the gold price

› › ›
           
 

 45
45

Ä 
  


1. Second, it might be wise to distribute

personal gold reserves to several
countries, in case of confiscation
2. Third, investors should always be well-
informed about world news which can
influence the gold price

› › ›
           
 

 4D
4D

c 
 

Gold scams are

1. Fraud
2. Misrepresentation
3. Market manipulation

To know the typical gold scams is the first

step to avert them

› › ›
           
 

 4 
4 

c 
 

First, Fraud
1. Buying scrap gold (old jewellery) for only
half or less of the gold price can be
considered as fraud

2. Typically Businessmen having this in

mind announce their scrap gold sale in
local radio stations and rent a hotel lobby
on a Saturday morning for this purpose

› › ›
           
 

 4·
4·

c 
 

1. Another way of fraud is selling gold

numismatic coins at prices which highly
surpass the material and collector·s value

2. The victims are often old people who can

easily be tricked into this business deal

› › ›
           
 

 4r
4r

c 
 

1. From time to time Nigeria Emails arrive

in the inbox

2. Here, a businessman with connections to

Nigerian gold mine tries to sell gold by
the kilo for prices that are far lower than
the current gold rate

3. Of course, this was a legal business and

gold export licenses did exist

› › ›
           
 

 50
50

c 
 

1. The only catch, for the transaction it is

necessary to fly to Nigeria

2. (It is up to the email recipient to decide

whether this is a genuine business
opportunity)

› › ›
           
 

 5151

c 
 

Second, Misrepresentation

1. Imagine, a bank sells gold which the

buyer never physically receives, but which
is stored in the bank·s vault

2. The bank further charges the gold owner

storage fees

3. So fine so good
› › ›
           
 

 52
52

c 
 

1. Let·s now assume the owner of the

precious metal insists on seeing the gold

2. Now it is discovered that the bank never

actually possessed the gold

3. How would one call the bank asking for

storage fees of something that was never
stored?

› › ›
           
 

 53
53

c 
 

1. Do you think this incident is highly

hypothetical, or would only happen in
dodgy countries?

› › ›
           
 

 54
54

c 
 

1. Well, this allegedly happened at the bank

Morgan Stanley

2. In 2005 a class-action suit was filed

against Morgan Stanley

› › ›
           
 

 55
55


  
 

1. The bank was accused of selling between

1986 and 2005 physical gold and other
precious metal to clients who paid fees
for storage at this bank

2. But allegedly Morgan Stanley either made

no or a different investment on behalf of
its clients

› › ›
           
 

 5D
5D


  
 

1. The result was that Morgan Stanley would

pay US$ 4.4m to settle this class action
suit

2. "While we deny the allegations, we settled

the case to avoid the cost and distraction
of continued litigation," Morgan Stanley
said in a statement

› › ›
           
 

 5 
5 

c 
 

hird, Market Manipulation

1. What is market manipulation?

2. These are actions that try to distort the

market equilibrium out.

› › ›
           
 

 5·
5·

c 
 

1. For example, in the beginning of 2007

there was an incident regarding naked
short-selling among stocks of smaller
mining companies

2. Here, shares were massively sold to force

the price of the shares down

› › ›
           
 

 5r
5r

c 
 

1. Also, governments could be labelled as

market manipulators if the restrict the
free trade of gold

2. Vietnam is such as case

3. In the beginning of 2011 it was reported

that the government had plans to ban the
trade of gold bars on the free market

› › ›
           
 

 D0
D0


  

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› › ›