Saving & Investing into Gold

0908-029A- Gold-STitle
Ref: 0908-029A  of 11th August, 2009


When almighty GOD created this planet and HIS most precious creation HUMAN, he did not have idea how to make them live in a herd or society as different from millions of other life forms. HE knew that the tiny little brain created for human was the most creative and destructive part of his body. HE also knew that the human will be competent enough to communicate with another human by creating a medium of his own. This is what the brain was meant for.

However, the GOD was nonplussed at the very idea of a human exchanging any material item with another human without set standard. The Almighty then amused at Himself; and looked at some of the precious items exchanged between Deva and Devi (subordinated Gods and Goddesses) – the precious stones like diamond, pearl, stones etc. but they were not so definable. HE finally looked up in the sky at Sun and Moon and looked at their bright and dull colors – shining Yellow and grayish white. He found similarity of those colors in earth’s mineral – GOLD and SILVER. He decided to use them as “Common Definable Exchange Medium” as means for humans to deal with each other.


This is how the word “Exchange” appears to have been invented. The humans went a bit further – they used another adjective “Foreign”‘ as different from own. This is how “Foreign Exchange” was born.

Too long name, felt the human. He was used to using abbreviation such as “Bob for Robert”, Bill for William”, “Mike for Michael” and “Don for Donald”. He thought; three, four and five letters should be enough to describe the object. So “FOReign EXchange” was reduced to FOREX. This is how the human advanced his knowledge to “FOREX Reserve”.

GOLD & SILVER – Real Money

Gold and Silver were therefore the earliest form of exchange medium called “Money” used by the human society from time to time. Kings, Queens, Sultans, Mughals, Raja and Maharajas have always used this “money” as reference to prosperity what we call Wealth. In earlier times, we also had “www” that we use very liberally in internet as World Wide Web; the meaning only changed. Earliest form of www equaled to Wine, Woman and Wealth – the main objects of war. Most of the wars were fought for these three elements.

Even today, when a person becomes very wealthy, he drinks wine and then seeks a woman. In the process, he loses his wealth. He earns and then destroys himself. Nothing has changed so far as human psychology is concerned.

Gold and Silver were therefore most primitive form of investment. Even property emerged as second choice of investment because of larger outlay of funds at one time. Gold can be bought in small lots.

BondSr_MainPictWe therefore start with the GOLD (and SILVER) as a means of investment. Most people in their conscious or sub conscious mind always start with the investment in gold or silver. These are the metals gifted by GOD, so let us pay attention how to invest into them. I am now bringing you back to today’s age. Who has seen God anyway – this author must be bluffing!

When a human could not get enough gold or silver, he created money or paper currency. When the paper money was not enough, he created electronic money called derivatives, options, warrants, stocks, bonds, convertibles and host of structured products that really had no structures such as CDO or CDS. However, the most important element was that all these products were ultimately convertible into gold. Since the gold was scarce, and the papers were plenty, an inverse relationship developed between paper (currency) and gold. If papers were limitless, the gold has to rise in tandem with the supply of paper currency. This is theoretical of course. There is no coordinated timing between the two. But when the excesses exceed the expectations, the gold rebalances itself and starts asserting. It is happening now.

Today however, most people hate and love GS. They hate Gold and Silver (GS) and love Goldman Sachs (GS again). Ask Warren Buffet. It is a battle royal between physical and paper.


Before I explain various products under Gold category, I would explain the timing of buying gold now. According to my research, the United States has frittered away most of its gold by lending to hedge funds for shorting operation. It will never come back. They shorted it in $260~$360 range. now the gold is at $950. They are losing over $600 per Troy Ounce.

The Treasury/FED shows holding of 8134 tons of gold which has remained constant for over years. However, the loss of gold has been cleverly concealed in the form of “Earmarked Gold” and tricky language similar to Yudhisthir’s famous quote “Naro va Kunj rova” in Mahabharata.

Although United States has 8134 tons of gold physically, it has lost title to it for almost 6297 tons of gold. It is like a warehouse keeper who holds your inventory. It is not his, but yours. But he holds it physically but its true title vest in you. Similar is the situation for gold.

The world production of gold is about 2500 tons. If the loss of 6297 tons of gold by United States becomes public knowledge, hell will let lose in the gold market, and shorts will rush to the market to cover their position. Read my book: “Sub Prime Resolved” Chapter 14 under the title “Where is Mackenna’s Gold”. (buy it by clicking the banner on the right)

It is absolutely eye opener. This reason is alone to push the price of the gold through the roof in days or months to come.

Type of gold Investment

In olden days, right up to 1980, Gold was traded in its metal form and at the most in the form of Futures and Options contract. With advances in paper currency age, the gold has become tradable in many forms.


What is the difference between “Savings” and “Investment”?

  1. When the certain form of money or asset is returnable to you without any monetary loss in same currency, it is called “Savings.”
  2. When the owner of funds deposits the money into any other form of local or foreign instrument (stocks, bonds, options, futures, ETF, Mutual Funds etc.) or foreign currency that can rise or fall in value in or against the local currency, it is called Investment.


Gold is a real universal currency. It can be exchanged into local currency of any country at any time. In other words, the Gold is fully convertible currency in real terms. It never loses its quantitative value – If you buy 10 grams today, it will remain 10 grams even after 50 years.

Further, it is purest form of metal which never gets tarnished or loses shine. If you throw anything into fire, it will be burnt to ashes, not Gold. It will shine. Go to any jewelers’ shop for polishing the gold. Some old fashioned jewelers use the ordinary flame (gas or even candle) to purify or polish the gold to its original finish. (No chemicals are needed). It is the only inert metal not affected by any acid or base.

There are 4 purest form of life or matter that exists today, some are visible, and some are not.

  1. GOD   – Invisible and yet exists, He is felt everywhere
  2. SOUL  – Invisible and yet exists. It is felt everywhere
  3. Truth – Invisible and yet exists, it is also felt everywhere
  4. GOLD – Visible, touchable and tangible.

Following are the various forms of products relating to gold which can be either savings or investment. Many consider long term savings as long term investment.


(To see the pictures and description, Click here)

  1. Physical gold in purest form (999 or 9999 quality)
    1. Bought mostly by Central Banks, Mints, IMF, Jewelers, Coin makers, Gold based funds, Gold ETF, and individuals. This is traded on COMEX and other commodity exchanges. This is BEST OF ALL
    2. Gold in ornamental form (18 to 22 carat category)
    3. Mostly by citizens of AAA countries – that is – Arabs, Africa and Asia (Indian subcontinent included) (THIS IS BEST FOR INDIVIDUALS)


  1. Gold in Coin form – issued by government, banks and private mints. Although at 999 purity, they are marked up by 10% or about. Examples: Maple Leaf, Eagle Coins, Kruggrand (from South Africa)
  2. Gold as Collectors Coins – of 999 purity. They have store value and trade anywhere 15% to 30% premium. You will never see the gain by yourself. This is meant for hobbyists or for person having too much money


Most people find hard to buy the gold physically due to several constraints – source, storage and liquidity in local market. If the gold is bought as “ornaments” in Asian nations like India and China

  1. Paper Gold – in the form of Gold Passbook issued by many banks such as Hong Kong Bank (HSBC) Bank of China and Hang Sang Bank in Hong Kong.
  2. Gold Pool: Some leading gold traders like KITCO offer an investor to buy into gold pool. That is, your holding in gold is physical but held in common pool. If you need physical delivery of bought gold, they will deliver by insured mail subject to administrative and shipping cost. The advantage is the investor can buy the gold as if it is physical, held in trust with the gold trader and exchangeable into physical gold if necessary. However, level of protection differs from firm to firm.
  3. Gold ETF – exchangeable into physical gold if required. No one has tested them for physical delivery as yet. ETF stands for Exchange Traded Funds. These are in electronic form of security, listed on stock exchange, providing for liquidity, satisfaction that one invested in gold and charges for buying, selling or storage (in account with brokerage firm or DMAT form in India) at minimum cost. This is liquid if only the {Name} ETF is popular.
  4. Gold Stocks: of mine producers. You will find them more in USA, Canada, Australia, UK and Africa. Many mine owners are listed on USA and UK as GDR or ADR.
  5. Gold Futures & Options: traded usually in multiples of 100 Oz on commodity exchanges like COMEX and many exchanges all around the world. These are leveraged instruments. On some exchanges, they are physically exchangeable into physical gold or cash settled (meaning, one gets the dollars or currency of trade, being the difference between purchase and sale price)
  6. Currencies of Gold producing countries: The nations like US, Canada, Australia, South Africa and Soviet Union are leading producers of gold. If the gold rises, these currencies also rise, though not in same proportion. However, it works at its best if you buy the Convertible Bonds of Mine Producers in respective local currency (convertible). When the gold rise, the stock of mine producer rises, and the currency may also rise.

Gold Units: The most common unit is ounce or Troy Ounce. This is used by investors or gold traders while buying physical gold. Again, the popular units depend on cultural practices in the country. In Hong Kong and China, the common units is TAEL (= 37.5 grams), in India Tola (used to be about 11 grams, now replaced by 10 grams). The prices are usually quoted in international market as $/Troy Ounce. All other units are referenced to this price.

Many investors get cheated by the price. There are two Ounce measures as under:

  1. Ordinary Ounce (used in normal measurement. 1 lbs (Pound) = 16 ounces. 1 Ounce = 28.3495 grams or 28.35 grams (if quantity is not large)
  2. Troy Ounce (= 31.1035 grams. This is the universal standard in which the gold prices are usually quoted. The gold price is quoted as $ PTO or US Dollar Per Troy Ounce.

Some banks in India for example, use ordinary ounce to quote the price. So they charge the investors 31.1035/28.3495 = 109.71% or the customer is overcharged by 9.71% or nearly 10%.

Troy Ounce:

The traditional unit of weight for gold

1 troy ounce              = 31.1034768 grams.
32.15 troy ounces     = 1 kilograms (Kilo)
32,150 troy ounces   = 1 metric ton (1,000 kilos)
1000 troy ounces      = 31.1 kilograms

BEFORE YOU BUY GOLD, Consider the following factors:

  1. Like any investment product, before you buy anything, consider the most important thing – whether you can sell as easily as you can buy? If your answer is NO, do not buy that form of Gold. PERIOD
  2. In which country you are buying – in a country with convertible currency or in a country with non convertible currency regime with fixed or pegged rates. Examples: US, UK, Australia, New Zealand, Euro, Canadian dollars, Singapore dollars
  3. If you are buying outside your country, you will be taking exchange risk of the foreign currency vs. domestic currency. This could be advantage or disadvantage.
  4. Do you want to buy in Physical or Paper form? The rule is physical is physical and paper is paper. I personally never trade physical for paper – that is my self discipline. But you as investor may decide which form suits you best.
    1. We live in internet age. If war erupts, the very first casualty is Internet. If the World War III erupts, the paper based gold will simply disappear. You can not even access your account over the net. The bank or broker can also refuse to pay saying that their server is down
    2. When you buy paper, you rely on the credit worthiness of the bank or the broker. You know pretty well how worthy the top banks are. Many brokers like Lehman Brothers, Barings have simply disappeared. Thus, your investment could still turn zero if you deal in paper gold.
    3. If political stability of the country where you live is not so good, and if you are an alien (immigrant), do not take chance with paper gold. If your ethnic community is driven out (the way Jews were driven out by Hitler, Indians by Idi Amin in Uganda, and Military Junta in Burma), the paper investment could turn zero.
    4. Still, paper form is good so long as the orderly market for papers exist. Unless major banks sink to the bottom of the sea and financial crisis deepens further (which I believe it will), the physical gold will win over the paper.
  5. If you decide to buy physical gold, decide whether it is
    1. for investment purpose or savings purpose. Most Indian women will not let their family members to sell gold even if the prices may have risen 3 times. They consider outgo of gold as bad omen for their prosperity, especially if you have bought ornaments instead of gold bars or lagdi (another form of gold bar. This term is used in India. They also call “Biscuits” because some rectangular bars look like Biscuit. The round shape is often called “lagdi”.)
    2. Never buy investment gold in ornamental form. The dealer usually charge 10% to 20% more while buying and also deducts 10% when you wanted to sell. Thus, if the gold has not risen by 30% at least, you do not make any profit.
    3. For Investment purpose, buy only 999 or 9999 gold. They are easily saleable in any retail market.
    4. Do not buy larger unit, say 100 oz. Buy in multiples of 1 or 5 ounces or 1 to 5 taels (in Hong Kong). If you have bought from the bank, the bank will instantly pay you on spot.
    5. However, if try to sell to a gold dealer (say in India), you take a trading risk. You deliver gold to a dealer who will pay you after 3 or 4 days. If the dealer has existed for long time, then the risk is reduced. While selling to a gold dealer, who will pay only after a few days, sell it bit by bit that is in small lots at one time. Until previous payment is cleared, do not sell any more.
    6. If you decide to sell gold in a country like India, and you have to wait for 3 or 4 days, better sell against invoice (even if you have to pay 2% tax), so that you have proof that you delivered the gold to him and payment is due from the dealer (must be mentioned on the invoice itself)
    7. If you do not have storage space in your home and you do not have bank locker, do not buy physical gold. Instead, consider Gold ETF where the ownership is secured in the form of statement from broker or authorities. Other instruments like Paper Gold may also be a good substitute.

This article is not complete. Second part will appear on 16th August, when each investment product will be discussed in greater detail. Resource links will also be provided. Please note that the entire subject may take a long series which is not the intention of this primer series. The idea is to show major points as briefly as possible. The practical issues will be given more importance than the theory of gold or charts etc. This article is meant for ordinary individuals who want to know why, when, in what form and from where he should buy the gold, and how to avoid major losses in preventive steps.

Anil Selarka,
Hong Kong, 11th August, 2009

PDF File Download from Scribd

Document Statistics:
Pages 7; Words 2,934; Characters (no spaces) 13,485;
Characters (with spaces) 16,373; Paragraphs 81;  Lines 300

Leave a Reply

Your email address will not be published. Required fields are marked *