History

Human beings have coveted silver and gold consistently for more than 6000 years. Gold treasures have been found dating back to as early as 4000 BC. By 3600 BC, Egyptian goldsmiths began melting gold ores to separate the metals inside. As early as 3100 BC we have evidence of a gold-to-silver value ratio in the code of Menes, the founder of the first Egyptian dynasty. In the Menes code it is stated “one part of gold is equal to two and one half parts of silver in value.” This ratio continues to be part of the bullion industry, the current ratio is approximately 70:1

People began mining silver in 3000 BC in modern day Turkey.

Our ancestors used tonnes of silver fashioning valuable ornaments, jewellery, and eating utensils. When Spanish explorers arrived in the “New World” of Central and South America they encountered different native people. The Spanish and Incas had very little in common. Diverse old native Indian cultures spoke entirely different languages than European Spaniards, they worshipped entirely different gods, and they lived very different lives day to day. What they both did hold in common was a high esteem for gold and silver using them to craft some of their life’s most important tangible objects . Gold and silver became de facto money around 600 BC when they were struck in Lydian coins as stores of value used for trade. For over 2500 years, silver and gold monies have proven themselves as the ultimate monies.

On August 15, 1971 the world for the first time began being operated on a 100% fiat currency reserve and faith based monetary system. This was the date when former U.S. President Richard Nixon cut the last ties between gold and the U.S. Federal Reserve note.

Today all physical and digital government issued currencies are fiat, their creation conjured by a computer and printing presses. Their values are based on people’s faith and confidence.

Fundamentals of Gold & Silver

Wars have been fought over gold and silver, love is often expressed with it, entire cultures and peoples have been massacred for it, and civilizations and world history have been dramatically shaped by it.

Gold, Silver, Platinum and Palladium are traded globally on an almost continuous basis from Monday through to Friday during the working week. The two key markets the metals are traded on are firstly the physical spot market and secondly as futures or option contracts on financial exchanges. Although there are other ways to participate in the markets for these metals, most noticeably via Exchange Traded Funds (ETFs) and Contract for Difference (CFDs), these vehicles act as proxies for the wholesale markets themselves.

Gold and Silver are one of the only financial assets available today that is truly default proof. Unlike most other assets on paper, gold and silver cannot be made worthless by the failure of others. Other than a risk of outright theft, physical gold and silver cannot go bankrupt. Gold is literally the bedrock of the entire global financial system.

Although silver is scarce compared to many other elements and resources, it is the most plentiful and least expensive of the elements which have earned precious metal status.

Silver’s natural properties make it…

• the most reflective metal on Earth.
• the most electronically conductive of all metals.
• the most thermally conductive of all metals.
• naturally anti-bacterial.
• very soft and malleable, only slightly harder than gold.

Gold and Silver Supply & Demand

All over the world, gold and silver has emotional, cultural and financial value, which supports demand across generations. Gold and Silver are fashioned into jewellery and used to manage risk in financial portfolios and protect the wealth of nations; they are found in smart phones, and cutting-edge medical diagnostics.

These diverse uses for gold, in jewellery and technology and by central banks and investors, mean that across the decades different sectors in the gold market have risen in prominence at different points in the global economic cycle. This self-balancing nature of the gold market means that, typically, there is a sustained base level of demand.

The annual total supply of gold has averaged around 4,000t over the last 10 years. While many will be aware that gold is sourced from the earth through mining, this is not the only way in which gold is supplied to the market. Total mine supply – which is the sum of mine production and net producer hedging – accounts for two thirds of total supply. Recycled gold accounts for the remaining third.

Mine production

The sources of mine production have become as geographically diverse as gold demand.

China was the largest producer in the world in 2015, accounting for around 14 per cent of total production. Asia as a whole produces 23 per cent of all newly-mined gold. Central and South America produce around 17 per cent of the total, with North America supplying around 16 per cent. Around 19 per cent of production comes from Africa and 14 per cent from the CIS region.

Producer hedging

There are times when gold producers will want to lock in a future price for their gold – for example, so that they can ensure a return appropriate to their current production costs. The gold sold into the market adds to supply in the short term. It brings metal on to the active market – and allows mining companies to sell metal ahead of their production schedules.

Recycled Gold

Because gold is virtually indestructible, all the gold ever mined still exists, apart from a small amount which has been lost. At the end of 2015, there were 186,700 tonnes of stocks in existence above ground

It is recoverable from most of its uses and capable of being melted down, re-refined and reused. Recycled gold therefore plays an important part in the dynamics of the gold market. While gold mine production is relatively inelastic, the gold recycling industry provides an easily-traded supply of gold when it is needed, thereby helping to stabilise the gold price.

Silver Supply & Demand

Silver has innumerable applications in art, science, industry and beyond.

At the highest level, though, demand for silver breaks down into three important categories: silver in industry, investment, and silver jewellery. Together, these three areas represent more than 95 % of annual silver demand. In 2014, 594.9 million ounces of silver were used for industrial applications, while over 215.0 million ounces of silver were committed to silver jewellery and 196.0 million ounces were used in coins and medals.

With unique properties including its strength, malleability and ductility, its electrical and thermal conductivity, its sensitivity to and high reflectance of light and the ability to endure extreme temperature ranges, it is an element without substitution.

Mistakes in Investing

• Buying gold coins driven by gold fashion is one of the major mistakes to avoid. Usually when everybody is buying gold coins, the prices for gold bullion coins are high.
• Putting too much money into buying gold coins. Mixing Coins and bars of different metals is a good way to spread the risks.
• Buying from the wrong source is one of the critical mistakes many novice investors make. If you are not familiar how common physical bullion coins look, you might end up buying a fake or paying too much.
• Do not take advice on buying gold coins from your peers, relatives or friends. All these people might have totally different investment goals in mind. Study the market yourself and stick to your investment plan.
• Not knowing the current spot price of gold when buying gold coins. You will be surprised to know how many people are buying gold coins without first checking how much an ounce of gold is worth on a given day.
• Buying rare gold coins without proper numismatic knowledge is simply not smart. Rare coins require a practiced eye, ability to assess their grade, mintage characteristics, knowledge of what similar coins are going for and many other highly specific facts about rare coins.
• Buying rare coins for the investment purposes. Some dishonest coin dealers are trying to sell you numismatic coins as an investment.
• Not considering buying silver coins is a mistake to avoid. When the price of gold is so high, a lot of people are still considering buying gold coins exclusively. But what about silver coins? Silver coins are great to have for the worst case scenario survival purposes, especially when the price of silver is so much lower than that of gold’s.
• Confusing investing in bullion coins with other gold investment mechanisms. Investing in gold stocks, futures and ETF’s requires strong analytical abilities and thorough knowledge of the market not all novice investors possess.

How the fix works

The London Gold Fixing (or Gold Fix) is the setting of the price of gold that used to be held on the premises of Nathan Mayer Rothschild & Sons by the members of The London Gold Market Fixing Ltd. However, in 2004, Nathan Mayer Rothschild left the precious metals business in London and sold its place on the fixing to Barclays. From that time onwards, the fixing has taken place via a dedicated conference line. This was clearly a necessity as some banks moved their London operations away from the close proximity to the Bank of England and gravitated to areas such as Canary Wharf.

However, the benchmark is still determined twice each business day of the London bullion market – the exceptions to this being Christmas Eve and New Year’s Eve when there is only one fixing which is in the morning. It is designed to fix a price for settling contracts between members of the London bullion market, but the gold fixing informally provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world’s markets. The gold fix is conducted in the United States dollar (USD), the Pound sterling (GBP), and the Euro (EUR) daily at 10.30am and 3pm, by London time.

The current participants in the fixing are Barclays, the Bank of China, Bank of Communications, Goldman Sachs, HSBC Bank USA, JPMorgan Chase, Morgan Stanley, Société Générale, Standard Chartered, ScotiaMocatta (Scotiabank), the Toronto-Dominion Bank, and UBS.

Paper Gold

Paper gold, simply described, gives an investor the right to a simple piece of paper. This is not a gold claim, but rather a holding that is merely trading with the price of gold. There is not any gold that is backing up the asset. The investor also does not have a promise that they will ever hold the rights to any physical gold. A paper gold owner is merely a creditor to the group that is providing the paper gold certificates or accounts.

As an example this article from March 2016 shows there are 542oz of per gold to every 1oz of physical gold. A worrying ratio (542:1)

https://www.moneymetals.com/news/2016/03/07/paper-gold-comex-leverage-000837

Bars or Coins

Gold Bars Pros

• Most newer bars come in sealed packaging and are presented attractively Bars are usually issued with certificates
• They are typically produced in 24 carat (999 or 0.9999 fine)
• When buying larger sizes, the premium on bars can be significantly lower than coins as the production costs are lower.

Cons

• Liquidity issues when buying one big lump of gold. Holding a 1 kilo gold bar instead of 32 one ounce gold coins will offer you limited to no flexibility when realising your asset.
• You will have a higher market risk, as potentially you may only buy on one gold price when buying larger products.
• Production costs on small bars are significantly higher as the refiner will have to produce packaging, serial numbers and corresponding certificates for gold bars as small as 1g.
• Consequently, the premiums are higher on small gold bars compared to their gold coin counterparts.

Gold Coins – Pros

• Coins come in all sorts of sizes and designs. There is an abundance of choice when it comes to coins and aesthetics can certainly be a decisive factor.
• Coins are often stamped with a date, making them great for gifts marking important events such as Birthdays, Anniversaries and Weddings.
• Currency denominations are often used for coins which can sometimes come with benefits. Eg. Gold Britannia coins have £100 denomination making them CGT free.
• Greater liquidity and flexibility when buying gold coins as you can sell smaller amounts if you need to, when you need to.
• A lower market risk as you can buy smaller amounts and spread your investment over longer periods, buying on different gold prices.
• Collectible value: when buying certain coins you are not only buying them for the gold price but perhaps for any numismatic or collectible value they may have in the future.

Cons

• Coins typically don’t come with certificates – unless they are proof coins/coin sets.
• Not all coins are 24 carat.
• When buying larger investments, the higher production costs for coins will push the premiums up, meaning you could potentially get less gold for your money.

What is ‘Fiat Money’

Fiat is the Latin word for “it shall be.”

Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.

Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value. Most modern paper currencies are fiat currencies; they have no intrinsic value and are used solely as a means of payment.

Fiat money serves as a good currency if it can handle the roles that an economy needs of its monetary unit: storing value, providing a numerical account and facilitating exchange. Fiat currencies gained prominence in the 20th century when governments and central banks sought to alleviate their economies from the natural booms and busts of the business cycle. Because fiat money is not a scarce or fixed resource like gold, central banks have much greater control over its supply, which gives them the power to manage economic variables such as credit supply, liquidity, interest rates and money velocity. For instance, the U.S. Federal Reserve has the dual mandate to keep unemployment and inflation low.

Many throughout the economy had thought central banks had removed the threat of depressions or serious recessions, but the mortgage crisis of 2007 and subsequent financial meltdown quickly tempered this belief. A currency tied to gold is generally more stable than fiat money due to the limited supply of gold. There are more opportunities for the creation of bubbles with a fiat money due to its unlimited supply.

Note:

Precious metal prices can be volatile and the value of your metal may go down as well as up. No responsibility can be accepted by Aegis Vaults Ltd for any loss caused by acting on information we have provided.