Gold Valuation
Gold, often perceived as a safe haven for investors, actually generates no direct cash flow, which is a fundamental difference compared to other popular forms of investment. Unlike real estate, which can yield rental income, bonds offering fixed interest, or stocks paying dividends, gold remains a non-productive asset from a financial perspective. Its value is not underpinned by the potential to generate profit, but rather is shaped mainly by market mechanisms of supply and demand, as well as the movements of central banks and institutions. This characteristic makes gold, in the opinion of some investors, more of an asset for uncertain times or a method of preserving value rather than a consistent source of capital value growth.
Gold as a Remedy for Inflation?
Gold, often seen as an effective hedge against inflation, in reality does not provide such protection in the short term. Research and historical analyses show that although gold may maintain its value against rising inflation over the long term, in the short term, its price is susceptible to significant fluctuations that do not necessarily reflect changes in the inflation rate. These short-term gold price volatilities mean that it is not a reliable tool for protecting against short-term inflation spikes.
In the long term, gold often proves to be an effective hedge against inflation. Historical data indicate that despite short-term fluctuations, the value of gold tends to maintain or increase over long periods, allowing for the preservation of purchasing power in the face of currency depreciation. This is particularly evident in situations of prolonged inflation, where gold often maintains its value better than many other assets. This ability to retain value over the long term makes gold an attractive component of a diversified investment portfolio, especially as protection against inflationary risk.
All the information in this section was derived from a study conducted in 2002 by a team from Swinburne University of Technology, whose work has been cited extensively up to 390 times.
https://strathprints.strath.ac.uk/6926/6/strathprints006926.pdf
In summary, gold can be an effective protection against inflation, but only over a long time horizon, at least 20 years or more. In the short term, the price of gold is too volatile to effectively hedge against inflation. Therefore, investing in gold with the intention of inflation protection should be planned as a long-term strategy.
How Buy Gold Properly?
When deciding to invest in gold for more than 20 years, it is important to consider buying physical gold, such as coins or bars, rather than relying on gold-based ETFs (Exchange-Traded Funds). Investments in gold ETFs, especially those without actual physical gold backing, carry additional risks. In crisis periods, gold ETFs can encounter liquidity or solvency problems, as they do not always hold enough physical gold to cover their liabilities.
Additionally, when investing in physical gold, it is worth considering storing it in warehouses in countries with a good judicial and financial reputation, with Switzerland often cited as an example. Such a solution offers safety, protection, and potential tax benefits. The warehouses provide security against theft (and if located in a different jurisdiction than where one lives, they protect against the potential outlawing of gold, which has happened multiple times in history). This is an important matter, especially for investors planning long-term storage of their assets in gold and intending to possess quantities too large for home storage.
Golds history in relation to Derivative Markets
Through derivative markets, the price of gold may not reflect its real value due to various speculations and strategic actions of market players. Derivative markets, including futures contracts, options, and other financial instruments, allow traders to speculate on the price of gold without physically owning it. This can lead to situations where large financial institutions or investors influence gold prices through significant transactions or coordinated strategies. Such speculations can create discrepancies between the actual fundamentals of supply and demand for physical gold and the prices indicated in these derivative markets, leading to the undervaluation or overvaluation of gold.
To co zostało przedstawione wyżej to nie wymysły, a tego typu sytuacje zdarzały się wielokrotnie chociażby:
Two former precious metals traders from J.P. Morgan were convicted of fraud, attempts to manipulate prices, and spoofing as part of a market manipulation scheme. This scheme, which lasted from May 2008 to August 2016, involved tens of thousands of illegal trading sequences and resulted in losses of over 10 million dollars for market participants. Gregg Smith and Michael Nowak were sentenced to two years and one year and one day in prison, respectively, with substantial fines imposed. They employed a strategy of placing orders for precious metals futures contracts with the intent to cancel them before execution, thereby manipulating prices. The case, which was investigated by the FBI with the support of the CFTC, highlights the serious consequences of market manipulations.
Source: https://www.justice.gov/opa/pr/former-jp-morgan-precious-metals-traders-sentenced-prison
Considering the fact that individuals engaged in such activities are caught, it can be presumed that the phenomenon of market manipulation occurs much more frequently than it might seem. Knowing that such practices continue to come to light suggests that the problem may be widespread and often goes unnoticed or elusive to regulatory control mechanisms.
The Price of Physical Gold vs. Exchange Spot Prices
The natural difference in price between physical gold and certificates, resulting from its production costs, is the main factor causing differences in the Spot price and, for instance, an ounce of physical gold. This difference usually amounts to a few percent. The costs of producing gold cover a wide range of expenses – from geological exploration, through mining, processing ore, to refining and delivering the finished metal to the market. These costs, which can vary depending on the location of the mine, the depth of extraction, the quality of the ore, and technological efficiency, directly affect the market price of gold. Therefore, the price of physical gold will always include these additional costs, which distinguishes it from the prices of paper gold, where such factors do not have a direct impact.
During periods of physical gold shortage, the difference between the prices of physical gold and gold certificates can be significant. Physical gold, being a tangible asset, becomes more desirable in times of economic uncertainty, leading to an increase in its value compared to certificates, such as futures contracts or exchange-traded funds based on gold. This price disparity is often observed during financial crises and stock market crashes, when investors seek safe-haven assets. In such situations, physical gold is perceived as a "safe haven", while paper gold, although reflecting the value of gold, does not provide the same sense of security and certainty, as it is more exposed to market and financial risks.
Fun fact: Regarding silver, the situation where these prices differ significantly occurs much more frequently. For instance, at the beginning of 2023, when the price of silver on exchanges fell to around $22, all physical silver dealers had much higher prices, over 40% higher (the average production cost for silver is 20%), and additionally, delivery times reached up to 2 months.
