Transcript

Gold as an Investment

VISUAL CAPITALIST GOLD HISTORY OF GOLD MINING & SUPPLY USES & DEMAND A FOUR PART SERIES AS AN INVESTMENT SINCE 2000, GOLD HAS OUTPERFORMED THE S&P 500 EACH YEAR 9 OF 12 TIMES. 40% al,u. Il. 20% 0% -20% -40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 BUYING GOLD IN 2000 WOULD HAVE YIELDED OVER A 600% RETURN AT TODAY'S PRICES. Is gold a commodity or currency? How does it behave as an investment? What are the fundamentals of investing in gold? What are the different ways investors can get exposure to gold in their portfolios? GOLD: COMMODITY OR CURRENCY? GOLD FITS THE TRADITIONAL DEFINITION OF A COMMODITY, BUT IT HAS ALSO BEEN USED AS A CURRENCY FOR MOST OF HISTORY. AS A RESULT, GOLD EXHIBITS SOME CHARACTERISTICS OF BOTH A COMMODITY AND A CURRENCY. COM-MOD-I-TY [KUH-MOD-I-TEE] "THINGS OF VALUE, OF UNIFORM QUALITY, THAT WERE PRODUCED IN LARGE QUANTITIES BY MANY DIFFERENT PRODUCERS; THE ITEMS FROM EACH DIFFERENT PRODUCER ARE CONSIDERED EQUIVALENT." 200 IN THE LAST 30 YEARS, GOLD HAS HAD HIGH NEGA- TIVE CORRELATION (-0.65) WITH THE Ù.S. DÓLLAR, WHICH SUGGESTS IT BEHAVES LIKE A CURRENCY 150 100 50 1980s 1990s 2000s DOLLAR INDEX VS. GOLD INDEX MORE RECENTLY, GOLD HAS HAD AN EVEN STRONGER NEGATIVE CORRELATION (-0.85) WITH THE TRADE WEIGHTED U.S. DOLLAR INDEX. (1999 - 2009) COMPARE THAT TO COMMODITIES AND OTHER ASSET CLASSES: S&P 500 0.02 SOY BEANS 0.24 CRUDE OIL 0.29 A NOTE ON THIS GRAPH Mw GS COMMODITY INDEX 0.31 CORRELATION RANGES FROM -1 TO 1 AND IS A STATISTICAL MEASURE OF HOW TWO SECURITIES MONE IN RELATION TO ONE ANOTHER. IF POSITIVE, THE TWO SECURITIES TEND TO MOVE IN THE SAME DIRECTION - IF NEGATIVE, THEY TEND TO MOVE IN OPPOSITE DIRECTIONS. A ZERO CORRELATION MEANS THERE IS NO OBSERVABLE RELATIONSHIP. COPPER 0.42 SILVER 0.77 US DOLLAR INDEX (TRADE WEIGHTED) -0.85 ±1 NONE AMOUNT OF CORRELATION PERFECT GOLD IS ALSO HELD BY CENTRAL BANKS WHO HAVE TURNED INTO NET BUYERS SINCE 2010. TOGETHER, THEY HOLD AROUND 35,000 TONNES - OR ROUGHLY 20% OF ALL GOLD EVER MINED. CENTRAL BANK YOU DON'T SEE THEM HOLDING ON TO COMMODITIES SUCH AS CONCENTRATED ORANGE JUICE FOR THEIR RESERVES. GOLD INVESTING 101 HISTORY HAS SHOWN GOLD TO HAVE SEVERAL PROPERTIES AS AN INVESTMENT: GOLD HELPS DIVERSIFY A PORTFOLIO BECAUSE THE GOLD PRICE HAS LOW CORRELATION WITH MOST ASSET CLASSES AND IS DRIVEN BY DIFFERENT FACTORS, GOLD CAN HELP DIVERSIFY A PORTFOLIO. PORTFOLIO PERFORMANCE OVER 40 YEARS (1971-2011) 12% 11% 85% S&P 500 15% GOLD EQUITIES 10% OVER 40 YEARS, ADDING 15% GOLD 100% GOLD TO THE PORTFOLIO 100% S&P 500 EQUITIES WOULD HAVE HADA HIGHER RETURN 9% FOR THE SAME AMOUNT OF RISK. 8% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% AVERAGE ANNUAL VOLATILITY (STANDARD DEVIATION) GOLD IS A HEDGE AGAINST INFLATION & CURRENCY DEVALUATION AS THE MONETARY SUPPLY INCREASES, SO HAS THE PRICE OF GOLD. TOP 5 YEARS OF U.S. inflation $2000 $3000 $1800 $2500 $1600 $1400 $2000 $1200 $1000 $1500 $800 (SINCE WWII) $1000 $600 GOLD PRICE $400 A 1946 1974 1975 1979 1980 $500 $200 U.S. ADJUSTED MONETARY BASE (IN BILLIONS OF DOLLARS) $0 $0 1984 1994 2004 2012 DURING THOSE FIVE YEARS U.S. DEBT IS AT $16 TRILLION AND GROWING. IF THE US ECONOMY IS NOT ABLE TO PAY THIS OFF THROUGH GROWTH, THEY WILL LIKELY HAVE TO FURTHER DEVALUE THE DOLLAR TO BALANCE THE BUDGET. 130.4% PAST DUE THE AVERAGE REAL RETURN ON GOLD GOLD RETAINS ITS PURCHASING POWER WHEN THE COST OF GOODS RISES. -12.33% THE AVERAGE REAL RETURN ON STOCKS 140% 1500% 120% AS MEASURED BY THE DOW 1000% 100% 80% 500% 60% YES IT'S A HEDGE 40% 0% 1971 2000 + 2012 20% GOLD PRICE CPI (CONSUMER PRICE INDEX) 10 YR ROLLING % CHANGE 10 YR ROLLING % CHANGE GOLD HELPS PROTECT AGAINST VOLATILITY AND RISK IN TIMES OF ECONOMIC, POLITICAL, OR SOCIAL UNREST, GOLD HAS TRADITIONALLY HELD ITS VALUE. HERE'S A LOOK AT GOLD JUXTAPOSED WITH VIX (THE VOLATILITY INDEX). +350% +300% +250% +200% Gld +150% SPDR GOLD TRUST +100% +50% Vix VOLATILITY INDEX 2008 2009 2010 2011 SUPPLY AND DEMAND THERE ARE ONLY 439 GOLD DEPOSITS LEFT IN THE WORLD THAT ARE 1 MILLION OZ OR MORE, AND HIGH GRADE GOLD DEPOSITS ARE BECOMING INCREASINGLY RARE. HERE IS THE DISTRIBUTION OF THE 439 DEPOSITS BY GRADE: 20+ PRODUCING DEPOSITS 189 AT THE SAME TIME DEMAND IS INCREASING. INCOME PER CAPITA IS RISING IN CHINA AND INDIA – THE TWO 18 20 16-18 NON-PRODUCING DEPOSITS BIGGEST BUYERS OF GOLD W 14-16 250 ALREADY WORLDWIDE. EVEN CENTRAL BANKS ARE NOW NET BUYERS OF GOLD. S 12-14 10-12 8-10 6-8 4-6 2-4 GOLD WANTED 80 60 40 20 0 20 40 60 80 100 120 140 160 180 FACTORS AFFECTING THE PRICE OF GOLD SUPPLY&DEMAND MAGAZINE MACROECONOMIC FACTORS INTEREST RATES 10. EAT SAFES INFLATION GDP GROWTH O DEBT O ECONOMIC STRESS SAVING AND DISPOSAL 8. PLAYS A BIGGER ROLE THAN CONSUMPTION MOST GOLD IS NOT CONSUMED, BUT SAVED 2002 III|I 2008 I|I 2011 GEO POLITICAL SPECULATION MONTHLY MANIPULATION! CONFLICT SHORT SELLING! TENSION UNCERTAINTY NEWSPAPERS • MAGAZINES • SMOKES • DRINKS GETTING EXPOSURE TO GOLD THERE ARE DIFFERENT WAYS TO GET EXPOSURE TO GOLD IN A PORTFOLIO – EACH HAVE DIFFERENT BENEFITS AND LEVELS OF RISK. EXCHANGE-TRADED FUNDS ARE INVESTMENT FUNDS THAT TRADE ON STOCK EXCHANGES. GOLD ETFS TYPICALLY TRADE GOLD FUTURES, STORE GOLD BULLION, OR REPRESENT GOLD EQUITIES. GOLD ETFS ETFS ARE SIMPLE AND VERSATILE WAYS TO GET ETFS HAVE MANAGEMENT FEES AND COMMISSION FEES FOR EACH BUY AND SELL. SOME ETFS ALSO EXPOSURE TO GOLD IN A PORTFOLIO. HAVE LIQUIDITY ISSUES OR COULD IN THE FUTURE. GOLD BULLION PHYSICAL GOLD SUCH AS BARS AND COINS. TANGIBLE, PRIVATE, AND GIVE DIRECT EXPOSURE TO THE GOLD PRICE STORAGE CAN BE COSTLY AND HAS RISKS SUCH AS THEFT AND LIQUIDITY. GOLD MINING INVESTING IN COMPANIES THAT ARE MINING OR EXPLORING FOR GOLD MAJOR GOLD MINERS ARE LIQUID, PROVIDE LEVERAGE, AND CAN ADD DIVERSIFICATION IF THEY HAVE EXPOSURE TO OTHER COMMODITIES. GOLD MINERS ARE PROFIT SEEKING COMPANIES, AND AS WITH ALL EQUITIES, CAN ALSO HAVE GROWTH UPSIDE OR PAY A DIVIDEND. JUNIOR GOLD MINERS OFFER TREMENDOUS UPSIDE IF THEY FIND A NEW GOLD DISCOVERY OR GET BOUGHT OUT BY A MAJOR. ALL COMPANIES ARE NOT CREATED EQUAL AND THEREFORE MANAGE- MENT IS THE BIGGEST RISK. POLITICAL RISK, CURRENCY RISK, AND MARKET CYCLES CAN ALSO AFFECT COMPANY VALUATIONS. WHERE DOES GOLD FIT IN? BELOW ARE THE GOLD POSITIONS OF SOME NOTABLE INVESTORS WARREN BUFFET JIM CRAMER THE ORACLE OF OMAHA ISN'T GOLD'S BIGGEST FAN, BUT IF HE THE FORMER HEDGE FUND MAN- AGER AND MAD MONEY PERSON- INVESTED HIS FORTUNE 10 YEARS AGO IN GOLD INSTEAD OF ALITY SAID TO CONSIDER A 20% GOLD PORTFOLIO ALLOCATION IN AUG 2012 HIS OWN COMPANY, BERKSHIRE HATHAWAY, HE WOULD HAVE MADE A 440% VS. 82% GAIN. 20% HARRY BROWNE MARC FABER FOR HIS FAILSAFE PERMANENT PORTFOLIO, THE FAMOUS INVESTMENT ANALYST RECOM- ACCORDING TO BULLIONVAULT IN OCT 2011, THE FAMOUS CON- TRARIAN INVESTOR SUGGESTED MENDED THE FOLLOWING: THAT INVESTORS SHOULD ALLO- CATE A QUARTER OF THEIR PORTFOLIO TO GOLD BULLION CASH BONDS 25% 25% STOCKS GOLD JOHN PAULSON RON PAUL IN Q2 OF 2012, PAULSON HAD IN DEC 2011, A WSJ ARTICLE REVEALED RON PAUL INVESTS ALLOCATED HIS $21 BILLION FUND TO 44% GOLD AND 64% OF HIS PORTFOLIO IN PRE- CIOUS METAL STOCKS, INCLUDING RELATED EQUITIES 23 JUNIOR MINERS 44% 64% IN THE AUGUST 2012, GEORGE SOROS MADE HEADLINES BY DUMPING MAJOR US BANK STOCKS OF CITIGROUP, JP MORGAN, AND GOLDMAN SACHS TO BUY $130 MILLION OF GOLD VIA SPDR GOLD TRUST (NYSE: GLD) NEWS GOLD IS THE ULTIMATE STORE OF VALUE. GOLD HAS A TENDENCY TO STAY STRONG EVEN IN THE FACE OF INFLATION, UNCERTAINTY, OR CURRENCY DEVALUATION. 2000 AS CENTRAL BANKS CONTINUE TO INCREASE THE MONEY SUPPLY IN TODAY'S ECONOMIC CLIMATE, INVESTORS CONTINUE TO TURN TO GOLD AS A SAFE HAVEN FOR THEIR INVESTMENTS. 1600 1200 MEANWHILE, THE PRICE OF GOLD KEEPS RISING. 800 400 1990 1995 2000 2005 2010 2012 Visual Capitalist is committed to providing independently researched content for educational purposes. Thank you to the following companies for helping US Cover our costs in producing this infographic: EGOLDCORP TSX: G/NYSE: GG ALTAIR www.goldcorp.com GOLD INC STUPPLER TSX-V: AVX www.altairgold.com COMPANY INC GOLD & SILVER COINS AND BULLION SINCE 1960 PROSPERITY GOLDFIELDS PARENT COMPANY OF MINT STATE GOLD www.mintstategold.com TSX-V: PPG www.altairgold.com And a special thanks to: Cambridge House www.cambridgehouse.com INTERNATIONAL VISUAL CAPITALIST Educating a new generation of investors on resource investing and management VISUAL CAPITALIST www.visualcapitalist.com Top 5 Sources: World Gold Council http://www.gold.org Federal Reserve Bank of St. Louis http://research.stlouisfed.org/fred2/ U.S. Global Investors http://www.usfunds.com/investor-resources/nvestor-alert/all-signs-pointing-to-gold/ Wall Street lournal http://online.wsj.com/article/SB100014240527487039087045754336707717 Wikipedia http://en.wkipedia.org/wiki/Gold_as_an_investment For a complete list of sources, please visit: visualcapitalist.com/sources RAMS PER TONNE AVERAGE ANNUAL RETURN (US$)

Gold as an Investment

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Since 2000, gold has outperformed the S&P 500 each year 9 of 12 times. How does gold behave like an investment and what are the fundamentals of investing in gold? What are the different ways investo...

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