An Investment You Can Wear

In Asia people invest a significant proportion of their savings in gold jewelry. If you can buy it at the right price its a great investment and certainly a better way to flaunt your wealth than buying a Rolex watch, Herme`s scarf or other designer wear.

Hallmarked gold jewelry in the western world so exceeds the value of the bullion it contains that it could never be considered an an investment. Retail jewelry is often marked up by 300% or more in the shops (Note that insurance valuations are a fantasy based on replacement cost at retail. No piece can be sold at this value.)

In Asia and the Middle East gold jewelry is priced more competitively. Thai gold jewelry costs only around 4% over the spot price of gold which is about the same as gold coins . If you buy gold in the form of jewelry you have the added advantage of being able to use and enjoy it. You can't wear your coins or your share certificates to your friend's party! Another advantage is that the customs rarely bother about gold jewelry that you are wearing so it is a tax efficient way of bringing gold into your country from overseas.

You can buy gold bars in Thailand. These are called Tong Tang and are sold at the selling price of a baht of gold ie about 1% above the buying price.

Gemstones

Untreated colored gemstones, primarily rubies, sapphires, and emeralds are probably the best investment. The value of diamonds and colored stones is easier to measure than jewelry designs, since most important stones have lab certificates verifying their quality, and a buyer can look at comparable auction sales of similar stones over the past several years for a benchmark on its value.

Investing in Gold

Keeping your savings in gold is unlikely to make you rich but historically it has been a safe investment. Gold maintains its value over time. It is durable (can withstand fire, water, or trauma), and can be used to fund getting out of town in a hurry. It is a great protection against Black Swans.

In the West pension funds and mutual funds keep typically around 4% of their assets in gold partly as a hedge against inflation, partly as an alternative to major currencies such as the dollar and partly as an insurance against a major financial crisis. To invest in gold they buy shares in gold mines or futures contracts.

Other ways to invest in Gold

Gold jewelry is the best way to invest in gold if you can buy it at the right price, which probably means getting it from Asia or the Middle East. If that is not an option there are other ways to invest in gold.

Coins

An advantage of coins is that they are easy to sell anywhere in the world. People will buy coins without assaying them which is not the case with gold bars. The premium over the spot price of gold is around 3% which is not exorbitant; the price of gold can fluctuate by this amount is a single day.

Keep a gold coin handy to settle bets with your friends.

Shares in gold mines

A gold mine is a hole in the ground owned by a liar - Mark Twain

Stocks have an advantage over physical gold in that they pay a dividend. However not all gold mines are equal. A lot depends on how much, if any gold there is in the mine and how good the company is in getting it out. A company worth considering is BVN.

Exchange Traded Fund

It is possible to buy shares in a gold ETF called GOLD, which has the ticker symbol GLD. The shares are priced at the mid point between the buying and selling price of the spot price of gold.

There are some disadvantages to this way of owning gold. Firstly it is not physical gold. For those investors who want to own gold as a store of value in case of international chaos, having an undivided interest in gold sitting in a London vault will provide no comfort. Secondly while the expenses of the gold ETF are low, the Trust will have to sell part of its gold stores to pay these expenses. Thus, over time, the fractional amount of physical gold represented by each share will decrease. Perhaps the biggest problem of all though is the very ease of buying and selling an ETF which lures you into the trap of over trading, the downfall of many investors.

Future and Options

The principle futures contracts are YG, YI, ZG GC and SI.You can also buy and sell options on these contracts.

Derivatives are remarkable in that literally everyone without exception loses money on them: buyers, sellors, small retail investors and giant hedge funds and banks. Being an expert won't help either. Myron Scholes and Robert C. Merton, who won the Nobel prize for economics for their work in developing the Black-Scholes formula for pricing options, were on the board of directors of Long-Term Capital Management which lost 4.6 billion in less than 4 months dealing in options.

There are more enjoyable ways of losing money.

Day Trading Gold

Understanding the many nuances that cause the yellow metal to fluctuate in price is quite thorny. On one occasion, a report showing an overheating economy will be quite bullish for precious metals because gold is considered a hedge against inflation. Then another report will suggest a robust economy, and gold prices sink with thoughts of higher interest rates. News of intensifying conflicts in the Middle East can whip gold traders into a buying frenzy, yet gold prices fell for days following the terrorist attacks on September 11.

This interesting paper shows that the real price of gold varies inversely to the stock market

Gold and Tax

In the USA gold bullion is considered a collectible, so any long-term capital gains when you sell shares of GLD for example, will be taxed at a maximum 28 percent rate rather than the typical 5 percent or 15 percent max rate you pay on gains for regular stock investments. You would theoretically of course have to pay the same rate of tax on gains you made holding gold coins or jewelry.

Some example of Black Swans

In 1767 the Burmese attacked Ayutthaya, at that time the capital of Thailand. Some wealthy Thais suspected what was going to be the outcome and buried their wealth, in the form of gold, in the ground. The Burmese captured and totally destroyed the 'jewel of the East'.

6 months later the Thais were able to re-enter what remained of the city and recover their gold which the Burmese had never found. Although the Ayutthayan civilization was destroyed at least the Thais managed to preserve some of their savings.

In 1997 the Thai baht (the currency) fell 50% against the dollar overnight. Despite this there was little social unrest. Why? Because the Thais had much of their savings in gold.