The good is owned entirely by the investor. It may be stored outside of the investor’s custody, for example a bullion vault. Allocated goods are safe from the insolvency of financial institutions, carrying no counter-party risk.
Within gold investment there is a huge difference between allocated and unallocated gold. When you invest in gold you typically want to own a tangible asset that is outside of the leveraged financial system and free from counterparty risk. When you buy gold using our platform you buy allocated gold bars that you hold legal title to.
To test a metal for purity. For gold and silver bullion to be accepted by the professional markets the assay results must verify a minimum acceptable fineness set by the London Bullion Market Association. The purity standards for gold and silver bullion can be found here. Bullion that meets LBMA standards is said to be ‘good delivery’. When you invest in gold, or buy silver, using The Real Asset Company you buy good delivery bullion. Investing in good delivery bullion is important, as it means that when you come to sell, you are selling a guaranteed quality of gold or silver, and therefore achieve a higher price. You can read more about the importance of good delivery bullion for investors in our guide to gold investment.
A school of economic thought, often contrasted and compared to the Chicago School of Economics and Keynesianism. Unlike modern schools of economic thought it does not use mathematical or statistical analysis to explain economic phenomena, instead it looks at individual and value-based approaches, believing these better explain economic occurrences. Austrian economists believe the use of statistics can smother what is really happening, but by looking at individuals’ choices in regard to economic basics: demand, supply, price and the market we can understand economic events. This is known as methodological individualism.
Ludwig von Mises and Frederich Hayek collaborated in the 1930s to explain the business cycle – booms and busts. They argued that these frequently seen cycles are a direct effect of the injection of credit into the banking system. Murray Rothbard later theorised that Central Banks are entirely to blame for the boom and bust cyclical nature of our economies. From this he developed a libertarian critique of governments and the state.
The Austrian School is responsible for theories of marginal utility, opportunity cost, and the importance of free markets and the benefits which arise from them. Named Austrian after the identities of original advocators of this economic thought including; Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek. Carl Menger is credited as being the founder of the Austrian School after he published Principles of Economics in 1871, although, the principles of the school can be traced as far back as the fifteenth century.
An Austrian economist last received a Nobel prize in 1975 – Hayek for his work on the business cycle. However, since then the school has been put in the background and ridiculed in favour of Keynesianism and the Chicago School.
The Austrian School are advocators of a return to sound money and the gold standard. Austrians believe economic progress requires sound money conditions according to Lips, 2001. The reasons for this can be put no better than by Ludwig von Mises himself.
“The gold standard was the world standard of the age of capitalism, increasing welfare, liberty and democracy, both political and economic.”
More information and free access to many classical Austrian textbooks can be found here.
When the near-term futures contract price is higher than the contract with a later expiration date. When backwardation occurs in a market what it really means is that investors want to buy the underlying asset in question now rather than later. This can occur for a number of reasons, including fear that delivery will not occur in the future.
Backwardation in the silver market has been cited by a range of prominent silver investors as an indication of tightness in the market generally. These investors have urged that backwardation is conducive to a significantly higher silver price, as the market clambers to get hold of physical silver bullion. Whilst backwardation in silver futures contracts did occur at some significant levels in 2010 and parts of 2011, by 2012 levels of backwardation had eased significantly to perhaps negligible levels.
Some gold market commentators argue that a prolonged and significant backwardation in the gold futures market would be one of the key indicators that the fiat currency paradigm was failing or ending, and that gold bullion is returning as the centre-point of the monetary system again.
Backwardation concerns the gold and silver futures markets. When you invest in gold, or buy silver, using futures contracts you own a paper bullion investment. We do not believe that precious metals investments in paper form are fit for purpose. You can read more about the importance of guaranteed physical gold and silver bullion for investors in our guide to gold investment.
When you buy gold bullion with The Real Asset Company, your gold investment is held in the form of a bailment. We act as custodians of your gold bullion bars. When you invest in gold using The Real Asset Company you are participating in a “Bailment” Agreement.
This bailment is a legal relationship between The Real Asset Company, and you, the gold investor. We then act as the custodian or “bailee”, and you are the owner or “bailor” of the gold bars. As part of our online gold investment service, gold is stored with us as bailment.
What this really means for you is that once you have clicked to buy gold, this bullion is held in our allocated accounting system as registered to you. The gold bar cannot appear on The Real Asset Company’s balance sheet, we have no title to the gold, it is registered in your name, and we only store it for you. In the unlikely event of company failure, creditors cannot claim your gold bullion bars as theirs because of the Bailment Agreement.
Balance of payments
Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world over a given time period. These transactions include payments for the country’s exports and imports of goods, services, financial capital, and financial transfers. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
When all components of the BOP equation are included they must balance to zero with no surplus or deficit. For example, if a country like the USA is importing more than it exports, its trade balance will be in deficit, but the shortfall will be counter-balanced in other ways by funds earned from foreign investments, by running down central bank reserves or by receiving loans from other creditor nations.
Typically the form in which precious metals are traded and accumulated. Bars for gold and silver investment come in various weights and sizes. The most commonly traded bars of investment gold are 1kg and 400 ounce (approx. 12.5kg), whilst the most traded silver bars are 1000 ounce (approx. 34kgs).
When you buy gold or silver using The Real Asset Company you are buying a piece of a larger bullion bar sourced from the professional gold and silver markets. All bars for gold and silver investment are of ‘good delivery’ status and bought in ‘allocated’ form. For more information on the importance of buying good delivery gold that is allocated in your name, read our guide to gold investment.
A general decline in the market over a period of time. A transition from investor optimism to widespread lack of investor confidence.
Some analysts term the period 1980 to 2000 a bear market for gold investment. Gold market expert, the late Ferdinand Lips, wrote a seminal book titled ‘Gold Wars’; in this book he provides a detailed and interesting analysis of the reasons for the length and depth of this gold bear market. Understanding the dynamics at work then, compared to today’s gold market, may be a useful exercise for those who invest in gold.
To expect the prices to fall.
A commodity-money standard which is backed by two metals, traditionally gold and silver. The currency is convertible into two metals at a fixed price.
The ‘bid’ is the price the buyer is willing to pay in a market for the asset being traded. The bid will always be lower than the ‘offer‘ in a market. For example – in our silver investment market, the smaller number on the left is the bid, and the larger number on the right is the offer. The bid in our silver market is the rate at which participants (you and any other clients) in the market are willing to pay to buy physical silver bullion. The difference between the bid and offer is known as the spread and dictates how efficient the market in question is. We believe the spread in our silver market is the most efficient you will find to buy silver online.
The black swan theory or theory of black swans events is a metaphor that encapsulates the concept that an event is a surprise and has a major impact. After the fact, the event is rationalized by hindsight and deemed unsurprising.
The theory was developed by Nasim Nicholas Taleb to explain:
- The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology
- The non-computability of the probability of the consequential rare events using scientific methods
- The psychological biases that make people individually and collectively blind to events outside of their bounded rationality and unaware of the massive role of the rare events in history and investment markets
Black swan events, considered extreme outliers, collectively play vastly larger roles in our lives and futures than regular occurrences.
Some gold and silver investors might deem the potential future collapse of the fiat money system and rises in the gold price and silver price as a black swan event that they understood but that was not appreciated or forecast by the mainstream.
Also Credit or Fixed Income Market, a financial market where participants can issue new debt in a primary market or buy and sell debt securities in a secondary market, usually in the form of bonds. The bond market serves to provide a mechanism for long term funding of public and private expenditures.
The bond market is where the world’s creditors lend money to the world’s debtors at prices set by supply and demand for credit in the market. The bond market is often cited as the one of the most powerful forces in the world of economics, and countries often depend on the bank market to finance themselves. The European banking crisis that started in 2009 has resulted in the PIIGS initially having to pay far higher interest rates to bond buyers, and then to the bond market refusing to lend these nations any more money. The EFSF was established to provide a backstop these nations.
When talking about owning a nations debt (bonds) Amschel Rothschild famously quipped: “Let me issue and control a Nation’s money and I care not who makes its laws”.
A monetary arrangement, 1946-1970, involving 43 nations. Named after the summit held at Bretton Woods, USA, to decide on a new international currency system. The last link to the gold standard. The Bretton Woods System was designed to assure stability and reduce the need for gold reserves. Currencies were tied to the US Dollar and only the Dollar remained convertible to gold, and backed by gold bullion bars in Fort Knox and Westpoint. The Bretton Woods agreement left the US as the only country able to determine its own monetary policy according to Gros, 2010, as they were left with the highest gold reserves at the end of WWII. “The system [seemed] to relieve every other country but the United States from strict monetary discipline,” Hazlitt, 1978, p157.
A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases.
Some investors cite a bullish trend for gold and silver investment starting in 2000. For more information on bull markets, gold and silver, try our Comment & Analysis section.
To expect the price to rise.
Generic name for gold and silver when in bar or ingot form. Bullion is the most traded form of gold and silver, usually in ‘good delivery bars’.
According to the World Gold Council, bullion banks are investment banks that act as wholesale gold suppliers dealing in large quantities of ‘good delivery bars’. Bullion banks are required to be members of the London Bullion Market Association (LBMA)and are distinct from depositories in that they handle transactions in gold whilst depositories merely store gold bullion. For example, the New York Federal Reserve stores gold for foreign central banks and the US Bullion Depository in Fort Knox houses most of the national gold bullion reserves of the USA. When a central bank conducts gold loans or gold sales, the physical location of the bullion does not necessarily change. The bullion banks conduct the financial transactions and ownership and title transfer takes place in the depository records.
The world’s largest bullion banks will be familiar names to many, whilst the bullion banks that are market-making members of the LBMA are: The Bank of Nova Scotia (Scotia Mocatta), Barclays Bank Plc (Barclays Capital), Credit Suisse, Deutsche Bank AG, Goldman Sachs International, HSBC Bank USA NA, JP Morgan Chase Bank, Merrill Lynch International Bank Limited, Mitsui & Co Precious Metals Inc, Société Générale, UBS AG.
Contemporary gold or silver coin. Used as an investment and store of value rather than for transactions. Typically available in different weights. Examples include the Kruggerrand, American Eagle and the Canadian Maple Leaf. Buying gold coins is similar to buying gold bars of small sizes – a useful trinket to keep at home, but not efficient enough for larger gold investments.
The capital account (also known as financial account) is one of two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation’s net income, the capital account reflects net change in national ownership of assets.
A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows will effectively be borrowings or sales of assets rather than earnings. A deficit in the capital account means money is flowing out the country, but it also suggests the nation is increasing its claims on foreign assets.
Capital controls are enforced measures such as transaction taxes and other limits to prohibitions, which a jurisdiction can use to regulate the flows into and out of the country’s capital account.
Capital control include exchange controls that prevent or limit the buying and selling of a national currency at the market rate, limits to the allowed volume of international sale or purchase of various financial assets, transaction taxes, minimum stay requirements, requirements for mandatory approval, or even limits on the amount of money a private citizen is allowed to expatriate from the country.
Also known as capital ratios, are the requirements for banks and other depository institutions which determine how much capital must be held against a certain level of assets. These requirements are put into place to ensure that these institutions are insulated against the risk of default and that they have enough capital to sustain operating losses while still honouring withdrawals from depositors. Capital requirements can also be known as regulatory capital.
There has been much debate about capital ratios in investment communities as the leverage in the banking system has risen to potentially problematic risks as the banks have taken on greater levels of risk in the pursuit of greater profits and return on capital. Going into the Credit Crunch of 2008 commercial banking institutions were routinely leveraged by 20:1, and investment banks, like Merrill Lynch, by 37:1. A number of investors and high profile stewards of the financial system, like Lord Adair Turner of the FSA, have questioned whether such a thinly capitalised banking system is a prudent and stable model.
Can also be known as a reserve bank. A public institution which has monopoly over currency issue, currency minting, interest rates and regulation of the money supply. They are also responsible for the commercial banking system. Lenders of last resort in times of banking crises.
For more information about central banks, their raison d’être, and their relationship to gold investment try our Comment & Analysis section. In this section we regularly examine the actions of central bankers within our financial system.
The Commodity Futures Trading Commission (CFTC) is an independent agency of the United States government established with a mandate to regulate the commodity futures and option markets in the United States. The CFTC therefore supervises the markets for gold and silver futures and options contracts that are traded on US exchanges such as the Chicago Mercantile Exchange (COMEX) and the New York Stock Exchange (NYSE).
The CFTC’s role, independence and effectiveness has been called into question by recent allegations of manipulation in the gold and silver markets. These allegations were given increasing weight by a whistle-blowing trader called Andrew Maguire. These allegations cited that certain banks were acting inappropriately and in collaboration in the gold and silver markets for a trading gain and at the expense of other investors. The CFTC has now been investigating these claims for two years without any official statement or conclusion. Some large funds and institutions that invest in gold have made a big song and dance about the issues of manipulation, whilst other gold and silver investors are less focused on these issues believing that any such manipulation must be pretty inconsequential for the gold and silver prices to have been rising for the last 12 years.
Chain of integrity
When the phrase ‘chain of integrity’ is used in the gold market, what people are concerned with is whether the gold bullion in question has left the professional market’s chain of integrity. Once the gold bar has been assayed and is of proven weight and purity to be accepted by the professional markets, if this bar then remains in professional vaults recognised by the London Bullion Market Association (LBMA) and international financial exchanges, this gold bar is said to have remained in the gold market’s chain of integrity. it has never left, does not need to be re-assayed and can be easily traded and exchanged. Gold bullion that remains within the chain of integrity is said to be of good delivery status.
All the gold bullion bars, and other precious metals, for purchase on our platform remain within the chain of integrity and has good delivery status. Our platform extends the professional gold market’s chain of integrity to you the retail gold investor. Using our platform you can buy gold and silver bullion that meet the standards established by the LBMA, and and also platinum and palladium bullion that meet the standards established by the London Platinum and Palladium Market Association.
For more more information about the investment process using our platform use our ‘How to guides’. To learn more about why we believe we are expertly qualified to deliver a highly professional and secure precious metals investment platform read our ‘About Us’ section. If you have any further questions about the security of the precious metals available on our platform, please contact us.
Classical Gold Standard
Metallic standard. Monetary regime dominant in the Western World 1870-1914. Dominated international trade for the period.
In his book ‘Currency Wars‘, investor and financial consultant, Jim Rickards has the following to say about the classical gold standard:
“The classical gold standard of 1870 to 1914 has a unique place in the history of gold as money. It was a period of almost no inflation – in fact, a benign deflation prevailed in the more advanced economies as the result of technological innovation that increased productivity and raised living standards without increasing unemployment”.
We compare paper money with sound money regularly in our Comment & Analysis section. In this section we analyse different types of gold standard, monetary history, and what it all means for those who invest in gold today.
The Committee for Monetary Research & Education (CMRE) as ‘a non-profit educational organization, seeks to promote greater public understanding of the nature of monetary processes and of the central role a healthy monetary system plays in the well-being, indeed, in the very survival of a free society’.
Run by President Elizabeth Currier, the CMRE is an educational think-tank and lobby group that holds an Austrian economic world view and seeks a return to sound money, and money backed by gold and silver bullion and weights.
The CMRE is another organisation, like the Foundation for Advancement of Monetary Education (FAME), which is mentioned by gold and silver investors like Ben Davies of Hinde Capital and Eric Sprott of Sprott Asset Management. The CMRE’s contribution to the cause of sound money, liberty, freedom, and social progress has arguably been huge. Those that invest in gold and buy silver are often aware of CMRE and its hugely respectable leader Elizabeth Currier. Ms Currier is well known to many in the gold investment market, and her views on monetary issues, gold and silver are often found on websites providing for gold and silver investors. For example – Ms Currier provided a reference, and is mentioned in the foreword, for Ferdinand Lips’ ‘Gold Wars‘, a book we feel is a bible to gold and silver investors.
Properties, assets or securities that are offered to secure a loan or other credit. Sometimes this collateral is put up to meet a broker or exchange’s margin requirements. Collateral can be seized by the party that extended you the credit if you default. If you have a 50% mortgage on your house, the bank has lent you this money in the knowledge that the other 50% of the house’s value has been pledged as collateral against the loan. If you suddenly become unable to pay your mortgage, the bank can recover their lost income from this collateral.
Gold bullion can be used as collateral, and was considered as a solution to back the debts of European nations of Italy and Greece. Gold Bullion bars have been increasingly accepted in the financial markets by brokers, banks and clearing houses. Clearing houses, that sit as the backstop behind international exchanges, have been seeking to beef up their financial ballast amid market volatility by accepting more gold bullion as collateral. In October 2011 LCH.Clearnet (about the world’s safest financial counterparty) became the latest clearing house to accept gold bullion as collateral.
Commitment of traders’ report
The Commitments of Traders (COT) is a report issued by the Commodity Futures Trading Commission (CFTC) showing the holdings of participants in various futures markets each week. The weekly COT report shows the open interest in the futures market; the number of traders that have bought and sold the financial contract in question. In the gold market, looking at the COT data can show how many traders want to buy gold bullion bars or sell gold bullion using the futures market for that contract month. Looking at the COT data for gold investment can help investors understand what the large commercial traders are doing, what the net short positions are and what the level of participation in that market it. During extended consolidations in the gold price, analysts often look at the COT data to judge when changes on the gold market might happen. For an example of analysis of how activity in gold market, as shown by the COT, might affect the gold price try this featured article.
Financial and legal term. The risk that one party in the contractual arrangement will not meet is contractual obligations. Counterparty risk exists for both parties in the arrangement.
By owning ‘allocated’ gold bullion and silver bullion this risk is removed. For more information about the importance of counterparties to investors, how this fits into gold investment, and the financial system’s counter-party nature, try our Comment & Analysis section.
Currency war, or competitive devaluation, is where countries compete against each other to achieve a relatively low exchange rate for their own currency. When the value of a particular currency falls, so too does the real price of exports from the country. The devaluing country’s domestic industry, and thus employment, receives a boost in demand. However, corresponding price increases in imports can harm citizens’ purchasing power. Devaluation can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade as a devaluation ‘race to the bottom’ occurs.
Currency wars are one of the most destructive events in international economics. They can be limited to one country stealing growth from their trading partners, or escalate into bouts of inflation, recession, retaliation and potential violence and war.
In his book ‘Currency Wars’, investor and financial consultant, Jim Rickards argues that the world is in the the throws of the third great currency war and that Federal Reserve may have “engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money of a trillion-dollar scale”. For more information on currency wars, financial instability, and the implications for those that invest in gold, try our Comment & Analysis section.
The current account is one of the two components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest, dividends and windfalls from investments) and net transfer payments (such as foreign aid and financial support).
The current account balance is one of the two major measures of the nature of a country’s foreign trade (the other being the net capital outflow). A current account surplus increases a country’s net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
The opposite of inflation. Deflation occurs when inflation in an economy falls below 0%. “A contraction in the money supply outstanding over any period aside from a possible net decrease in specie may be called deflation” Rothbard.
When ownership of the asset is transferred from buyer to seller. This does not have to be a physical movement, instead it may be done on paper acknowledging the transfer of ownership. When you buy gold bars on our platform, you receive instant settlement as the gold bullion is delivered to you in the vault.
Currency, comprising of individual coins or banknotes, can be demonetised and cease to be legal tender (for example, the pre-decimal United Kingdom farthing or the Bank of England 1 pound note). Demonetisation is not always permitted. Gold and silver as currency may have circulated less during certain periods of monetary history, but have rarely been successfully demonetised by the authorities.
In the USA the Coinage Act of 1965 applies to all US coins and currency regardless of age or form. The United States’ Coinage Act of 1965 states that: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes and dues. Foreign gold or silver coins are not legal tender for debts.”
The United Kingdom’s Coinage Act of 1971 sets out that gold sovereigns are also legal tender for any amount.
Depositories are storage facilities, similar to professional vaults, that provide a full range of specialised precious metals custody, accounting and shipping services to financial exchanges, institutions and industrial companies. They are another way of storing gold and silver bullion for the professional market. The most famous depository is probably Delaware Depository Service Company (DDSC). The DDSC is used by international exchanges (COMEX & NYSE Liffe), investment banks, brokerages, refiners, major retailers, coin dealers and even retail investors.
Gold investors that use depositories get access to high-security vaults that are typically constructed and maintained in compliance with the Bank Protection Act and UL standards. When you store your gold bullion within a depository, your gold investment typically remains your legal property, and is recorded as a ‘bailment‘ in the records of the depository. As such you maintain ownership of allocated gold bullion bars.
A security whose price is dependent upon or derived from the underlying assets. The derivative’s value is determined by price fluctuations in the underlying asset. Underlying assets can include stocks, bonds, commodities, currencies, interest rates and market indexes. Derivative contracts are often characterized by high leverage. A gold option contract is an example of a gold derivative.
Dollar cost averaging
Dollar cost averaging (DCA) is buying a fixed dollar amount of a particular asset on a regular schedule regardless of the price. More is purchased when prices are low, and less is bought when prices are high.
DCA has often been recommended as a considered and useful way to buy gold bullion and buy silver bars. Read more about how DCA relates to gold and silver investment here.
A doré bar is a semi-pure alloy of gold and silver, usually created at the site of a gold mine or silver mine. These bars of gold doré or silver doré are then transported to a refinery for further purification before eventual sale onto the gold market or silver market.
Efficient market hypothesis
The efficient market hypothesis (EMH) is a theory that states it is impossible to “beat the market” over long periods of time because market efficiency causes existing asset prices to reflect all relevant information. According to EMH, assets always trade at ‘fair value’ making it impossible for investors to consistently find price discrepancies and profit from them. It should therefore be impossible to outperform the overall market through expert stock selection or market timing.
EMH is a part of modern financial theory that can be traced back to Louis Bachelier, a French mathematician at the turn of the 20th century, and is highly controversial and disputed. Academics point to a large body of evidence in support of EMH, but an equal amount of dissension also exists. Notable investors, such as Warren Buffett and George Soros have consistently beaten the market over long periods of time, which is impossible according to EMH.
Critics of EMH also point to market events where prices rise or fall drastically in manias and panics as evidence that stock prices can significantly deviate from their fair values. A number of prominent gold investors also take issues with EMH and other constructs of modern financial theory such as ‘value at risk‘.
European Financial Stability Facility. This was a bail out fund conceived by the EU leaders to help backstop the European banking system during its on-going insolvency crisis. The fund was initially well received by the markets, but later the initiative was found to be short on detail and legitimacy. The EFSF has to be funded to a certain size to achieve anything, and as further details of the fund emerged investors began to ask if it would achieve anything.
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
There are ETFs for gold and silver investment which The Real Asset Company believes are inferior investment products to owning allocated gold bullion and silver bars.
The Foundation for Advancement of Monetary Education (FAME) is ‘a non-profit group that advocates honest monetary weights and measures and argues against fiat monetary systems’.
Founded and run by Dr Larry Parks and Jon Parks, FAME is an educational think-tank and lobby group that holds an Austrian economic world view and supports US politicians such as Ron Paul who argue for a return to sound money, and money backed by gold and silver bullion and weights.
FAME is another organisation, like the Committee for Monetary Research and Education (CMRE), which is mentioned by gold and silver investors like Ben Davies of Hinde Capital and Eric Sprott of Sprott Asset Management. FAME’s contribution to the cause of sound money, liberty, freedom, and social progress has arguably been huge. Those that invest in gold and buy silver are often aware of FAME and its hugely respectable leader Dr Larry Parks. Dr Parks is well known to many in the gold investment market, and his views on monetary issues, gold bullion and silver investment are often found on websites providing for gold and silver investors. For example – Dr Parks provided a reference, and is mentioned in the foreword, for Ferdinand Lips’ ‘Gold Wars‘, a book we feel is a bible to gold and silver investors.
The term ‘fat tail’ is used to refer to extreme events of a low probability which are not forecast by market analysts. Another term used to refer to such events would be ‘black swan’.
From the Latin let it be done or by decree. Fiat currency is the currency system on which our economies are now based. It can be defined as “Paper currency not backed by gold, convertible foreign exchange, or even in some cases, government bonds,” Eichengreen, 2008, p236. Fiat currency has no intrinsic value; its value is that which is decreed by government, and as a result our monetary system is now built on government debt. Gold and silver backed money, or sound money, is the antithesis of fiat money.
Fixed / Pegged
Exchange rate regime where the value of a currency is fixed to the value of another currency, or basket of currencies, or even commodities such as gold. The Classical Gold Standard is an example of a fixed exchange rate.
The ‘fixing’ is short for the London gold fix and is the traditional procedure by which a reference gold price is determined twice each working day on the London bullion market. For a detailed history and explanation of the fixing click here.
Founded December 1913, US Central Bank, also referred to as The Fed. Responsible for monetary policy, financial stability and financial services. Since 1913 the role of the Federal Reserve has expanded significantly. It first purchased paper assets in 1914. Ben Bernanke is the current Chairman.
The Federal Reserve is the single largest gold owner in the world, with a reported holding of over 8,000 tonnes. These gold reserves have not been audited for many decades and the likes of Congressman Ron Paul has been pressing for an audit of the Fed’s gold bullion.
An exchange rate which allows currencies to fluctuate in value on the foreign exchange market, according to demand and supply for that currency in relation to other currencies. A clean float is not interfered with by governments, a dirty float or a managed float is the opposite.
Fractional Reserve Banking
Where only a fraction of bank deposits are available as cash and for withdrawal. As banks lend to one another, and each new bank deposit is considered money, banks can be seen as creating money and inflating the money supply. This is known as the deposit multiplier.
A contract between two parties which agrees to an exchange of an asset, of specified size, quality and quantity, at an agreed price for delivery on an agreed, future date. Traded on a futures exchange, there are futures contracts for gold and silver investment in what is termed the ‘paper gold market’.
When you invest in gold, or buy silver, using futures contracts you own a paper bullion investment. We do not believe that precious metals investments in paper form are fit for purpose. You can read more about the importance of guaranteed physical gold and silver bullion for investors in our guide to gold investment.
GATA, or the Gold Anti-Trust Action Committee, exist to “to expose, oppose, and litigate against collusion to control the price and supply of gold and related financial instruments”. Manipulation of the gold price is alleged to have been occurring for decades with the ‘London Gold Pool‘ being an open and explicit attempt by the Western central banks to suppress the gold price.
GATA was established in 1998 and arose from essays by Bill Murphy, a financial commentator (LeMetropoleCafe.com), and by Chris Powell, a newspaper editor. GATA was then formed and formally incorporated in Delaware in 1999. Bill Murphy then became chairman and Chris Powell became secretary and treasurer. GATA has collected and published dozens of documents showing Western treasury and central bank efforts to intervene both openly and surreptitiously against a free market in gold.
GATA holds international conferences for gold investors where a range of our favourite gold commentators often speak. These conferences have so far been held in Durban, South Africa, in 2001, Dawson City, Canada, in 2006; Washington, D.C., in 2008, and in London in 2011.
You can find mentions of GATA frequently in the research and interviews of gold investment heavyweights such as Ben Davies, Eric Sprott and James Turk. To keep up to date with GATA and their fight for a free and fairly set gold price visit their website.
Gold banking at its purest is essentially where money is 100% backed by gold, and is not fiat money like we use today. In a gold banking system the banking and payments system depends totally on gold as its basis. A gold banking system could be 100% backed, and not a fractional reserve banking system like we have today.
Whilst a gold banking system might be close of unimaginable to many individuals today, gold has been at the centre of our financial system since the dawn of civilisation. A range of prominent gold investors advocate a return to a gold banking system and sound money, and believe that this is essential to social progress and the financial system best suited to preserving our liberty and freedom.
Gold investor with a very strong degree conviction about the strengths and benefits of gold bullion bars as an asset class.
Gold Carry Trade
The Gold Carry Trade was a trade executed by major bullion banks and other financial institutions, often during the 1980s and ’90s, that is said to have compounded the effects of central bank activity of gold sales and gold loans on the gold price during these decades. These decades constituted the 20 year bear market in the gold price, after the bull market of the 1970s, and is well described by Ferdinand Lips in his book ‘Gold Wars‘ (Lips’ book is often deemed a must read book for gold and silver investors). With their enthusiasm to borrow leased gold from the central banks, the bullion banks made spectacular sums of money by executing the Gold Carry Trade. The bullion banks borrowed gold at a 1% lease rate, sold this gold (thereby putting more selling pressure on the market) and invested the proceeds in US Treasuries at a 5% yield. The Gold Carry Trade depended on a spread existing between the Gold Lease Rate and apparent risk free rate of return provided by the US treasury market.
Executive Order 6102, pass by Franklin Delano Roosevelt, required U.S. citizens to deliver on or before May 1st, 1933, all but a small amount of gold coin, gold bullion, and gold certificates to the Federal Reserve, in exchange for a fixed gold price of $20.67/ounce. Under the Trading With the Enemy Act of October 6th, 1917, as amended on March 9th, 1933, violation of the order was punishable by a fine of up to $10,000 and/or up to ten years in federal prison. Many gold investors sought to expatriate their bullion to countries such as Switzerland and Great Britain.
Order 6102 specifically contained a provision that covered the activities of artists, jewellers, dentists, and sign makers among others. The order allowed any person to own up to $100 in gold coins. There was also an exemption for “gold coins having recognized special value to collectors of rare and unusual coins”. This protected gold coin collections and gold numismatics from legal seizure.
The price of gold bullion from the Treasury for international transactions was thereafter raised to $35 an ounce, allowing the Federal Reserve to book a profit at the expense of private individuals. This episode and state profit has been criticised as on the greatest heists in the history of the United States. For this reason amongst others, American gold investors often prefer to hold their gold bullion off-shore, with Switzerland being a favourite vault locations.
The Gold Eagle is the official gold bullion coin of the United States of America. First released by the United States Mint in 1986. The Gold Eagle is offered in 1/10 oz, 1/4 oz, 1/2 oz, and 1 oz denominations, and is guaranteed by the US government to contain the stated amount of actual gold bullion weight in troy ounces. The actual gold bullion content is 0.9167 or 22 carat. It is authorized by the United States Congress and is backed by the United States Mint for weight and content.
Though we advocate keeping some gold and silver bullion coins at home for use in extremis, keeping anything more than a few hundred dollars in gold coin form is not necessarily advisable. For more substantial gold bullion investment we advocate that investors buy ‘allocated’ gold bullion bars that are stored in professional market vaults. Read our guide to gold investment options for more.
Gold Exchange Standard
The Gold Exchange Standard typically is where the authorities guarantee a fixed exchange rate with other countries on the gold standard. This is said to create a de facto gold standard, however the system is based on the guarantees of the authorities and thus politicians. Monetary historians are often dismissive of the Gold Exchange Standard as the Classical Gold Standard‘s flawed lesser alternative due to the potential for political interference. The Gold Exchange Standard is often a system that uses silver bullion or silver weights to be used as physical medium of exchange at the point of trade.
In his recent best selling financial book, ‘Currency Wars’, James Rickards argues that the currency system of 1921 to 1936 failed due to the “flaws of both the 1925 gold exchange standard and US monetary policy from 1928 to 1931″. During this time devaluing countries such as France and Germany gained a trade advantage, whilst countries like England, which tried to return to the pre-war gold standard, suffered, whilst the United States failed to live up to its international responsibilities. Mr Rickards provides an excellent contextual analysis of the Gold Exchange Standard and Classical Gold Standard which can be read in detail in our review of ‘Currency Wars’.
The ‘gold fixing’ is short for the London gold fix. This is the traditional process by which a reference price of gold is determined twice each working day in the London bullion market. For a full history and explanation of the gold fixing click here.
Gold Lease Rate
The Gold Lease Rate is the rate of interest holders of gold bullion demand from would be borrowers of gold. If the Gold Lease Rate is 1% per annum, then borrowers of gold will pay the lender this rate for the privilege of borrowing their gold bullion.
The Gold Lease Rate is sometimes known by the acronym GOFO. Since 1989 twelve of the gold market’s main institutions have contributed their rates for lending gold (against US dollars) to the GOFO page on Reuters and an average is calculated automatically giving the market, in effect, a gold LIBOR (London Interbank Offered Rate).
The rate of the Gold Lease Rate is sometimes considered an indicator to the gold market generally. The Gold Lease Rate has sometimes soared from low single figures to double figures upon announcements, like central banks telling the markets they would not continue their policy of gold sales in 2000, that were deemed to restrict supply of bullion to the gold investment market.
The Gold Lease Rate was also instrumental to the famous Gold Carry Trade that was exploited by bullion banks and institutions during the 1980s and ’90s. This Gold Carry Trade is beautifully described as part of a range of phenomena that contributed to a 20 year bear market in the gold price from 1980 to 2000, by Ferdinand in his must read book for those that invest in gold and buy silver, ‘Gold Wars’.
When commentators on the gold market, and sometimes silver market, talk about ‘gold loans’ they are usually referring to instances of central banks lending out their national gold reserves at a given rate to achieve a return. The rate of interest borrowers pay on this leased gold is known as the Gold Lease Rate.
Some commentators have identified significant selling and leasing of gold bullion by central banks during the 1980s and ’90s as a significant contributor to the 20 year bear market in the gold price. The late Swiss banker and eminent gold scholar, Ferdinand Lips, was one of these commentators whose views can be read more fully in our review of his book, ‘Gold Wars’. This book is often cited as a bible of the gold investment market and a must read investment classic.
Gold Maple Leaf
The Canadian Gold Maple Leaf is the official gold bullion coin of Canada, produced by the Royal Canadian Mint. The Canadian Gold Maple Leaf is one of the purest mass produced gold coins in the world with a gold content of .9999 millesimal fineness, with some special issues .99999 fine. This makes the Canadian Gold Maple Leaf 24 carats for all intensive purposes. Like many gold coins produced by national mints, only gold bullion mined in Canada can be used in the production of Gold Maple Leafs. The coin was introduced in 1979, a time when the only other widely recognised gold bullion coin was the Krugerrand. Krugerrands had become difficult for westerns to use for gold investment due to the economic boycott of South Africa during apartheid.
Though we advocate keeping some gold and silver bullion coins at home for use in extremis, keeping anything more than a few hundred dollars in gold coin form is not necessarily advisable. For more substantial gold bullion investment we advocate that investors buy ‘allocated’ gold bullion bars that are stored in professional market vaults. Read our guide to gold investment options for more.
Business or enterprise engaged in extracting gold from the earth’s crust and processing the mined material to the end product of gold bullion bars.
There are several gold mining techniques and processes by which gold may be extracted from the earth. These can be divided into three general categories: placer mining (there are 4 variants of this form of gold mining), hard rock mining and by-product mining.
Gold mining companies may chose to refine their extracted gold deposits into gold bullion before selling to the gold market, or may prefer to sell their gold extracted gold in doré bar form to a refinery.
Gold platinum ratio
The gold platinum ratio is often analysed by participants in the precious metals markets, although there is debate about how important an indicator it is to gold and platinum investors.
Platinum is approximately 15 times as rare as gold, and has traditionally traded at a higher price than gold. If the gold platinum ratio is 1, it requires 1 ounce of gold to buy one ounce of platinum. The gold platinum ration has typically traded above 1, meaning that it required more than one ounce of gold bullion to buy and ounce of platinum. At its simplest the gold platinum ratio tells you the relative value of the two most valuable precious metals to each other.
The platinum price has comfortably traded higher than the gold price for most of the last two decades, but this situation changed since the Credit Crunch of 2008. Much of platinum’s demand comes from catalytic convertors, and is thus linked to demand for cars. As a results the gold platinum ratio can fall below 1 when economic activity and confidence is low, and gold is relatively more valuable than platinum. Some investors use the ratio as a technical signal to aid their buying and selling decisions. There was significant market commentary about the opportunities to invest in platinum in 2010 and 2011 when the gold platinum ratio was below 1 for extended periods of time. The gold platinum ratio hit highs twice at 2.34 in January 2001 and at 2.31 in May 2008. The gold platinum ratio bottomed at 0.75 in September 1982.
The gold price is the rate at which gold trades in relation to a number of fiat currencies. The most referred to gold price is that quote in dollars per troy ounce. This dollar per ounce gold price has become the gold market’s reference price because the US dollar is the current international reserve currency. However, gold is not denominated only in US dollars, and is priced in every currency.
Investors can buy gold and sell gold in a range of currencies on our platform. To view past and present gold prices click here.
As for the term ‘gold loans‘, when commentators on the gold market, and sometimes silver market, talk about ‘gold sales’ they are usually referring to historical instances of central banks selling their national gold reserves to help keep a limit on the gold price. Sometimes these sales were more secretive and sometimes more open. When the world’s leading banks operated the London Gold Pool, selling activity was collectively planned and although the Gold Pool was publicly understood these operations were quite secretive. After the failure of the London Gold Pool the leading central banks often announced their policies of selling gold publicly in an effort to manage the gold price and keep sentiment in the gold investment market poor.
All of this activity might strike investors as short-sighted given that markets will always have their way, and one of the best articulations and analyses is presented by the late Swiss banker and gold market heavyweight, Ferdinand Lips. In his must read book for gold investors, and those that buy silver, ‘Gold Wars’. Herr Lips argues that gold sales and gold loans by central banks were one of a range of phenomena that contributed to a 20 year bear market in the gold price between 1980 and 2000. It is notable that by 2011 central banks were less inclined to fight the gold price and were net buyers of gold bullion.
Gold silver ratio
The gold silver ratio is often analysed by participants in the precious metals markets, although there is debate about how important an indicator it is to gold and silver investors.
If the gold silver ratio is 10, it requires 10 ounces of silver to buy one ounce of gold. When the gold silver ratio registers a high number, like 100, it means the gold price is high relative to the silver price. During these times gold can be deemed more or overvalued compared to silver. When the gold silver ratio is low, the opposite is the case and silver is relatively more valuable. At its simplest the gold silver ratio tells you the relative value of the two most important precious metals to each other.
In Roman times, the ratio was officially fixed at between 12 – 12.5. In the USA in 1792, the gold silver ratio was fixed by law at 15. The gold silver ratio averaged 47 during the 20th century. For more information on the historical gold silver ratio, see the table below with data from Wikipedia.
|Year||Silver price ($/ounce)||Gold price ($/ounce)||Gold silver ratio|
A metallic standard, example of a sound monetary system. Several variations of the gold standard have existed in history. “A pure gold standard exists when gold coins circulate and any notes or subsidiary coins are backed by gold in bank vaults” Eichengreen, 2008.
Term used to describe the facility in the Bretton Woods arrangement which allowed foreign banks to exchange their US Dollars for gold. The Gold Window was closed in 1971 by President Nixon. The anchor of gold was not replaced. Nixon’s actions defied Article I, Section 8 of the 1787 US Constitution “No State Shall make any Thing but Gold and Silver Coin a Tender in Payment of Debts”.
‘Good delivery’ is the status given to bars that are accepted by the professional markets and the London Bullion Market Association (LBMA). Good delivery gold must be a of a minimum fineness of 995.0 parts per thousand and remain part of the professional market’s ‘chain of integrity‘. Good delivery gold achieves a better resale value due to its verified purity, and is recognised by the international bullion markets.
The LBMA has its own requirements for gold and silver bars which are detailed below:
- Fineness: minimum of 995.0 parts per thousand fine gold
- Marks: serial number, refiner’s hallmark, fineness, year of manufacture
- Gold content: 350 oz t – 430 oz t
- Recommended dimensions
- Length (top): 210 – 290 mm
- Width (top): 55 – 85 mm
- Height: 25 – 45 mm
- Fineness: minimum of 999.0 parts per thousand silver
- Marks: serial number, refiner’s hallmark, fineness, year of manufacture, weight
- Silver content: 750 oz t – 1100 oz t (900 oz t – 1050 oz t recommended)
- Recommended dimensions
- Length (top): 250 – 350 mm
- Width (top): 110 – 150 mm
- Height: 60 – 100 mm
Gresham’s Law applies when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar values for economic transactions. The artificially overvalued money will in time drive an artificially undervalued money out of circulation and is a consequence of the unnatural price control. Gresham’s Law has often seen undervalued paper money drive gold and silver money out of circulation.
Gresham’s Law is named after Sir Thomas Gresham (1519–1579), an English financier during the Tudor era in the Great Britain. The phenomenon that Gresham’s Law observes had been noted even earlier, back in Ancient Greece in fact. One of the oldest, and perhaps most elegant references to it being by Aristophanes, in his play The Frogs. This play was written around the end of the 5th century BC and contains the verse below:
“Often has it crossed my fancy, that the city loves to deal
With the very best and noblest members of her commonweal, just as with our ancient coinage, and the newly-minted gold.
Yea for these, our sterling pieces, all of pure Athenian mould,
All of perfect die and metal, all the fairest of the fair,
All of workmanship unequalled, proved and valued everywhere
Both amongst our own Hellenes and Barbarians far away,
These we use not: but the worthless pinchbeck coins of yesterday,
Vilest die and basest metal, now we always use instead.
Even so, our sterling townsmen, nobly born and nobly bred,
Men of worth and rank and mettle, men of honourable fame,
Trained in every liberal science, choral dance and manly game,
These we treat with scorn and insult, but the strangers newliest come,
Worthless sons of worthless fathers, pinchbeck townsmen, yellowy scum,
Whom in earlier days the city hardly would have stooped to use
Even for her scapegoat victims, these for every task we choose.”
Defined as inflation of >25% per month by inflation and monetary expert Professor Peter Bernholz.
Bernholz’s book ‘Monetary Regimes and Inflation‘ is widely seen as one of the seminal books regarding monetary history and gold investment.
Inflation and hyperinflation may be feared by investors generally, but not so much by gold and silver bullion investors. Gold prices and silver prices tend to perform well during inflation and hyperinflation. Fear of inflationary periods is one of the principle reasons to buy gold or buy silver.
A sustained increase in the price of goods and services alongside a fall in money’s purchasing power Measured by the inflation rate – the annualized percentage change in the general/consumer/retail price index. Caused by an increase in the money supply. According to von Mises.
“What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. For Austrian economists inflation is a serious and damaging consequence of government and central banks’ power of the money supply, “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.” Von Mises, The Theory of Money and Credit.
A non-bank entity that trades securities and assets in large enough quantities that they qualify for preferential treatment and lower commissions. Institutional investors are protected by fewer regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
An example of an institutional investor would be a pension fund such as The California Public Employees’ Retirement System (known by the acronym CALPERS). Another example might be a large insurance company such as American International Group (AIG). Institutional investors such as pension funds and insurance companies manage huge sums of capital, often many billions, and are deemed the elephants in the financial markets. Their investment activity can have have a big impact on the markets in which they participate.
Few institutional investors invest in gold, and the potential for this institutional money to enter the gold market is cited as a significant potential driver of the gold price. We have looked at how little institutional investors participate in gold investment in one of our research articles.
Keynesianism is a macro-economic school of thought originating from the 20th Century economist John Maynard Keynes. The foundations for Keynes’ work were published in 1936 The General Theory of Employment, Interest and Money. Most economic decisions today appear to be based on Keynes’ theories. Keynesianism proposes private sector policies and decisions often result in inefficient macro-economic results. A mixed economy is proposed, with a dominant role for private enterprise but advocates central banks control monetary policy and governments control fiscal policy, in order to reduce the impact of the business cycle on the economy’s output.
With regard to policy actions of the last few decades, the financial authorities have been accused by a number of high profile financiers, academics, bankers and other market participants of having a flawed appreciation for Monetarism and Keynesianism.
Keynesians and Monetarists are by definition in support of fiat currency. They view the economy as something to be engineered through the manipulation of the money supply, amongst other things, something impossible under a gold standard. Keynesians and Monetarists still dominate academic thinking which goes a long way to explain contemporary under-appreciation of the benefits of a gold standard and sound money.
In his latest book, Currency Wars, investment banker and risk manager, James Rickards, argues strongly that: “Keynesianism was applied recklessly based on a mythical multiplier that was presumed to create income but actually destroyed it”. What Mr Rickards is focusing on here is one of the most controversial premises on Keynesianism; that money governments inject into the economy can achieve a multiplier effect and thus economic growth.
Unsurprisingly governments that are in favour of stimulus spending cite research that suggests a multiplier effect can be achieved. However, recent research by Taylor, Cogan et al, from Stanford University finds that “all of the multipliers are less than one” and that stimulus spending actually destroy private sector output. It might be best to judge that Keynesianism works only in limited conditions, and that therefore it is a special theory more than a general one. It appears that this is an observation not shared by many of the central bankers of the world.
Alternatively, the Austrian school of economics abhors central banks being allowed to interfere with our money and its supply. Austrian economists such as Murray N. Rothbard argue that Keynesianism is flawed, inflationary and highly dangerous. The Austrian school argues that Keynesianism is problematic for our liberty believing that money should be sound and circulate freely outside of the designs of politicians and bankers. Austrian economists deem Keynesianism problematic to the free and fair functioning of a market economy, that exists to serve us.
The Krugerrand is a South African gold bullion coin, which is one of the most recognised and famous coins within gold investment. The Krugerrand was first minted in 1967 to help market South African gold bullion. At this time South Africa was by far the world’s largest producer of gold bullion, a dominance that is much diminished in today’s gold market. The Krugerrand is produced by the South African Mint, and proved so popular that by 1980 the Krugerrand accounted for 90% of the global gold coin market. During the 1970s and 1980s a range of Western countries banned the import of the Krugerrand during trade embargoes placed on apartheid-era South Africa. Krugerrands have circulated freely again since the end of apartheid. The Krugerrand today is still a popular coin and widely held coin within gold investment.
Though we advocate keeping some gold and silver bullion coins at home for use in extremis, keeping anything more than a few hundred dollars in gold coin form is not necessarily advisable. For more substantial gold bullion investment we advocate that investors buy allocated gold bullion that is stored in professional market vaults. Read our guide to gold investment options for more.
In economics laissez-faire is an environment in which private parties are free to trade and transact in the absence of state intervention. State intervention can take the form of capital controls (human and financial), regulations, taxes, tariffs and enforced monopolies. Laissez-faire is a French phrase and literally translated means “let do”, but more broadly it means “let it be”, or “leave it alone.” Much of the debates within economic and political circles centre around to what extent economies should be left to operate on a laissez-faire basis.
A number of prominent gold investors are intellectually aligned with the Austrian school of economic thought and argue that it is in fact intervention in our money and markets that has caused the gross imbalances in our financial system that manifested themselves in 2008. Whilst the heart of these arguments centres around a flawed monetary system and the problematic effects of central banks (cited as an apparent cartel) gold investors such as Peter Schiff argue that intervention in various markets is responsible for many of our economic woes. This political interference is said to have distorted market forces and pricing, with the manipulation of interest rates and provision of credit being most obviously visible. Such manipulation of interest rates and credit, for example, enables politicians to purse their goals of increased home-ownership above what would be possible under a normally functioning market.
The medium of exchange which a country’s authorities deem to be universally acceptable in transactions. A government can dictate what medium of exchange can be used for settling trade via legal tender laws.
Legal tender laws are a hot topic of conversation in economic circles, with political movements in nations such as the USA lead by Dr Ron Paul, and other advocates such as Douglas Carswell MP in the UK. A range of promoters of sound money argue that we should repeal legal tender laws and allow gold and silver backed money to circulate freely as competing currencies. For more information about legal tender laws, money, and gold and silver, try our Comment & Analysis section.
The use of borrowed capital or financial instruments to fund an investment, e.g. a mortgage on a home. It can also be seen as the amount of debt used to finance a firm’s assets. If you have a mortgage of 75% of the value of your house, you have used 75% leverage to buy your house. The more leverage you use top make an investment, the greater exposure you have to movements in the price of the underlying asset. More speculative investors and traders use high degrees of leverage.
When the market moves in the direction you want, leverage can help you achieve greater profits, but the problem is that is the market moves against you it can wipe cause significant losses very quickly. When used inappropriately, leverage can work to destroy the value of your equity.
For example, let’s look at a case where you own a house worth £100,000 using 90% mortgage (£90,000) and own 10% equity in your house worth £10,000. If the value of your house rises 10% your house is now worth £110, 000, and your equity is now worth £20,000. But, if the value of your house fell 10% from £100,000 to £90,000 then you would have lost all your initial equity and still owe the bank the £90,000 mortgage. Your leverage in this case was 10:1 which meant you had 10 times the exposure to the price of your house going up or down.
We have concerns with the amount of leverage in the financial system, and believe this is one of many reasons to invest in gold, or silver. We also believe that it is better to buy bold bullion without leverage as gold investment can have some bumps in the road too.
An asset that can be converted into cash quickly and with minimal impact to the price received.
London Bullion Market Association
The LBMA is the London-based trade association that represents the wholesale over-the-counter market for gold and silver in London. The on-going work of the Association encompasses many areas, among them refining standards, good trading practices and standard documentation.
LBMA members facilitate the trading of ‘good delivery‘ bars during London trading hours.
London gold fixing
The London gold fixing or gold fix is the traditional procedure which has occurred for over 80 years by which the price of gold is determined twice each working day on the London market. The London gold fixing involves the five bullion banks members of the London Gold Market Fixing Ltd., and was traditionally conducted at the offices of N M Rothschild & Sons. The London gold fix was designed to fix a gold price for settling large contracts between members of the London bullion market. Outside of this London the gold fixing provides a recognised gold price that is still used as a benchmark for pricing a significant number of gold investment products and derivatives across the global market.
The gold fix is conducted in pounds sterling, US dollars and and the euro. The fixing process occurs to deliver a fix gold price twice each day at 10:30 and 15:00 Greenwich Mean Time (London time), via a dedicated secure conference call facility. Up until 1968 the gold price was fixed once a day, but then a second fixing was introduced at 15:00, to provide for the opening of the US markets, as the price of gold was no longer under control of the Bank of England after failure and collapse of the London Gold Pool. Bullion bank participants in the gold fixing are required to be members of the London Bullion Market Association.
The original five founding bullion bank members were: N M Rothschild & Sons, Mocatta & Goldsmid, Samuel Montagu & Co., Pixley & Abell and Sharps & Wilkins. The current five bullion banks who participate in the fixing as of January 2012 are:
- Scotia-Mocatta — succeeded Mocatta & Goldsmid and is part of the Bank of Nova Scotia
- Barclays Capital — Replaced N M Rothschild & Sons when they withdrew
- Deutsche Bank — Owner of Sharps Pixley, itself the merger of Sharps Wilkins with Pixley & Abell
- HSBC — Owner of Samuel Montagu & Co.
- Société Générale — Replaced Johnson Matthey and CSFB as fifth seat
Chairmanship of the meeting was permanently held by Rothschilds but now rotates annually between all five members. At the start of each fixing, the Chairman (representing one of the bullion banks) announces an opening gold price to the other 4 members. These member then relay this gold price to their customers who are on other lines and indirectly part of the fixing process. The customers of these 4 bullion banks then instruct their representatives to declare themselves as buyers or sellers at that gold price. If there are both willing buyers and sellers at that price bullion bank members then state the number of gold bars they want to trade. If at the first announced gold price there are only buyers or only sellers, or if the numbers of good delivery bars to be bought or sold does not balance, a more suitable gold price is announced and the procedure starts again until a suitable gold price and balance is achieved. The Chairman then announces that the gold price is fixed and this data is made available. The gold fix is good and is said to ‘balance’ if the buy amounts and the sell amounts are within 50 good delivery bars of each other. The fixing process lasts as long as is necessary to establish a gold price that achieves this balance and which satisfies buyers and sellers.
The London gold fixing might appear archaic but before the age of electronic platforms being able to centralise liquidity from around the world, the london gold fix was an effective way to bring all the bids and offers from the market to one place and one time in an effort to transparently centralise liquidity in an effort to ensure a fair price discovery process was allowed to set the gold price.
London Gold Pool
The pooling of gold bullion bar reserves by a group of eight central banks in the United States and seven European countries. The central banks agreed in November 1961 to cooperate to maintaining the Bretton Woods System of fixed-rate convertible currencies and suppress and maintain a gold price of US$35 per troy ounce via coordinated interventions in the London gold market.
Coordinated and concerted gold sales were used to balance spikes in the market price of gold as determined by the London morning gold fixing. The United States provided 50% of the required gold bullion inventory. This effort to control the gold price was successful for six years until the system became untenable and central bank efforts were unable to resist the market’s desire for a higher gold price. The artificially pegged price of gold was too low, runs on gold, the British pound, and the US dollar occurred, and France decided to withdraw from the pool. The London Gold Pool was abandoned in March 1968.
The London Gold Pool was followed by further efforts to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window was closed in August 1971 by President Richard Nixon. The closure of the gold window contributed to the onset of the gold bull market which saw the price of gold appreciate rapidly and peak at $850/ounce in 1980.
Margin is collateral that the holder of a financial asset has to deposit to cover some of the credit risk of their broker or exchange they are using to make their investment with. Margin is required to finance an investment if the investor has done one or more of the following:
- borrowed cash or taken credit from the counter-party to enter the transaction
- sold financial instruments short (eg – short selling a share in the hope of buying it back later at a profit)
- entered into a derivative contract
Investors can put up collateral in the form of cash, securities and potentially gold, and it is deposited in a margin account with the broker, exchange, or with a third party custodian. The type of collateral required as margin in the financial markets has come under greater scrutiny since the onset of the Credit Crunch of 2008 as financial assets have sometimes failed to perform. In this backdrop gold bullion has increasingly been considered as collateral. In October 2011 LCH.Clearnet (about the world’s safest financial counterparty) became the latest clearing house to accept gold bullion bars as collateral.
Market failure is a concept or phenomenon within economic theory where the allocation of goods and services by a free market is not efficient. Market failures might be viewed as scenarios where individuals’ pursuit of pure self-interest leads to results that are not efficient. Market failures are often associated with information asymmetries, non-competitive markets, principal–agent problems, externalities, or public goods.
Market failure is often cited as a justification for government intervention in the market or economy. Economists study the causes of market failure, and the potential means to correct such a failure when it occurs. Some types of government interventions, such as taxes, subsidies, bailouts, capital, wage and price controls, and regulations, can lead to a further inefficient allocation of resources, failing to alleviate the perceived limitations of the market.
The Financial Crisis that began in 2008 is sometimes cited as a market failure, although some other commentators would urge that this was a banking system run by agents who rationally understood that they would be saved from failure by state intervention if they over extended themselves and mismanaged their businesses.
A market maker is an individual or institution that quotes both a buy and a sell price in a market. Market makers exist to provide liquidity and make a small profit from providing the prices into the marketplace. For example – in the professional bullion markets market makers with efficient access to gold bullion (perhaps via gold mines) will make a spread around the spot gold price. After market makers have helped provide the early stage liquidity to get a market going other market participants will bring their liquidity to the market and a fair price will be set through a transparent price discovery process. In the wholesale financial markets this process leads to an incredibly efficient bid offer spread.
On The Real Asset Company’s platform we are the main market makers, although everyone else can place buy and sell prices too. We automatically place buy and sell prices into the bullion markets on our platform providing a very efficient spread to buy gold bullion. Other customers can then add to this liquidity and participate in the price discovery process. Because everyone can set their own buy and sell prices a very fair and efficient gold price is set in our market.
Medium of exchange
An instrument used to facilitate the sale, purchase or trade of goods between parties. Money, or currency, needs to be two things: an efficient medium of exchange, and an effective store of value.
Using a medium of exchange allows for greater economic efficiency and freer trade. Before an efficient medium of exchange, more primitive societies used a traditional barter system. Under a barter system, trade between two parties could only occur if one had and wanted what the other party had and wanted, and vice versa.
Gold and silver have acted as efficient mediums of exchange, and an effective store of value. Some argue that sound money backed by gold and silver cannot be an efficient medium of exchange due to the impracticalities of delivering quantities of metal. However, under a Classical Gold Standard paper notes were backed by metal. In a modern banking system electronic money could also be backed by gold in the same way. This would allow money to perform as an efficient medium of exchange, but also crucially also as an effective store of value.
A commodity-money standard. A monetary regime under which the currency is convertible into one metal at a fixed price. When bank notes, and checkable deposits, exist in the standard then they too are fully convertible into the value of the coins with metal value. The metal value of the coins, decided by law, is called the gold/silver/copper parity depending on the type of standard, and the parity is decided by law according to Professor Peter Bernholz. The banks, private and governmental, have a contractual obligation to redeem the paper notes and deposits into gold. The volume of everyday means of payment is geared to the volume of gold according to White, 2008.
Gold Standards, sound money, paper money and more are regularly discussed in our Comment & Analysis section.
If the bid price to buy gold in a market is $1,700/ounce and the offer price to sell gold is $1,720, the mid-point would be $1,700 + $1,720/2 = $1,710/ounce. You can calculate the gold price that represents the mid-point in our market by doing the same simple calculation. You will notice that the bid price and offer price in our markets are very close, or very efficient. This is important for your gold investment as it means you benefit from a very efficient spread and pay less to invest in gold.
Monetarism is a school of economic thought associated with Milton Friedman that emphasises the role of governments in controlling the amount of money that circulates in an economy. Monetary economists, such as Ben Bernanke and Paul Krugman, believe that variation in the money supply has major influences on national economic output in the short run and the price level over longer periods. Monetary economists also believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply.
Monetarists and Keynesians are by definition in support of fiat currency. They view the economy as something to be engineered through the manipulation of the money supply, something impossible under a gold standard. Monetarism and Keynesianism still dominate academic thinking which goes a long way to explain contemporary under-appreciation of the benefits of a gold standard and sound money.
In his latest book, Currency Wars, investment banker and risk manager, James Rickards, argues strongly that: “Monetarism is insufficient as a policy tool not because it gets the variables wrong but because the variables are too hard to control”. Mr Rickards urges that Monetarism “is based on unstable relationships between velocity and money” that make it “ineffective as a policy tool”. Monetarism can be criticised as a way for power to be concentrated by the central bank.
Alternatively, the Austrian school of economics abhors central banks being allowed to interfere with our money and its supply. Austrian economists such as Murray N. Rothbard argue that Monetarism is flawed, inflationary and highly dangerous. The Austrian school argues that Monetarism is problematic for our liberty believing that money should be sound and circulate freely outside of the designs of politicians and bankers.
Most governments have given exclusive power to issue or print the national currency to a central bank. In the USA a federal system of a central government agency in Washington (The Fed’s Board of Governors) and 12 regional Federal Reserve Banks does this. The national treasury must pay off government debt either with money it holds or by financing it by issuing new government debt. This new debt is sold to either the bond market directly or the central bank in order to raise the funds required to satisfy the debt.
In the later case involving the central bank, the central bank increases the monetary base through the money creation process. This means of financing government spending is called monetising the debt, or monetisation for short. Monetising debt is a two-step process where the government issues debt to finance its spending and the central bank buys the debt, increasing the base money supply within the economy.
Investors with an affiliation to the Austrian school of economic thought find monetisation generally abhorrent and argue that is causes inflation and destroys our purchasing power. These investors, including ourselves, argue that such central bank intervention is irresponsible and beyond the remit of what central banking should entail.
A medium of exchange used by humans to facilitate trade as an improvement from a primitive barter economy. Humans have typically used commodity money, either as the commodity unit itself or as paper backed by certain amounts of commodity. Whilst many commodities have been used as money including pepper corns in the Middle East, Whale bone coins by the Inuit, and bundles of tobacco in the early American States, the majority of human history has seen gold and silver used as money. Gold and silver coins or bullion have been used in sound money systems. Often the coinage has been of silver bullion, with some gold coins also circulating, whilst larger denomination notes have been backed by gold bullion bars in the central bank or national mints vaults. This form of monetary system is how the Classical Gold Standard operated from 1870 to 1910.
The opposite form of money is paper money that is not backed by anything tangible. This is known as fiat money, and has value only by government decree. As a result fiat money is only valued whilst investors and savers have trust and faith in the issuing government. History has shown that paper money systems last on average only 40 years, and are prone to being tampered with and devalued by the issuing government or authority. Paper money systems are inherently inflationary. As monetary economic expert Professor Peter Bernholz finds in his research, all the hyperinflations recorded in human history (+25% inflation/month) have occurred when paper money was circulating. You can read more about inflation, deflation, gold and silver investment in our Comment & Analysis section.
The money supply or money stock, is the total amount of money available in an economy at a given time. There are several ways to define ‘money’, but standard measures usually include currency in circulation, demand deposits (assets on the books of financial institutions belonging to depositors), and short term or revolving debt that is almost never paid off (credit card debt).
Money supply data are recorded and published by the government or the central bank. Analysts monitor changes in money supply because of its effects on the price level, inflation and the business cycle. There is strong empirical evidence of a direct relation between long-term price inflation and money-supply growth.
This is why some analysts find recent money printing in response to the Credit Crunch so concerning. The often cited example is Zimbabwe which saw rapid increases in its money supply and also saw rapid increases in prices (hyperinflation).
One of the traditional ways to value gold investments is to value public stocks of gold bullion against the current money supply. A range of money supply inputs can be used (M1, M2, M3, etc). This tells you what the gold price would need to be to cover the obligations of the country in question. We have looked at this way to value gold in our Research & Analysis section, with a look at the gold price within gold investment.
Moral hazard refers to a situation where a party makes a decision about how much risk to take, while another party bears the costs if things go wrong. This could be where the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.
Moral hazard arises because individuals or institutions do not take full responsibility for their actions. Some commentators believe there is a chronic lack of responsibility in the financial system today because of the distortions of moral hazard and lack of accountability.
Coins which differ from bullion coins due to their rarity, provenance, appearance and condition. Therefore, they are often valued above the value of their precious metal content. Generally valued higher than bullion coins, numismatics can be made of gold or silver bullion.
Although for investors with a deep knowledge of gold and silver coins investing in gold or silver numismatics can be lucrative, for investors without this knowledge such gold or silver investments are fraught with risk. Numismatic coins can sell for many multiples of the value of the gold or silver they contain because collectors values the rarity and/or beauty of the coin in question. This makes investments in gold or silver numismatics similar to investing in stamps or other collectible rarities. Some people do make money trading these coins, but typically they are experienced brokers and dealers who can buy at a steep discount and sell at a large mark up.
For more information on these issues try our guide to gold investment.
The ‘offer’ is the price the seller is willing to sell at in a market for the asset being traded. The offer will always be higher than the ‘bid‘ in a market. For example – in our silver investment market, the smaller number on the left is the bid, and the larger number on the right is the offer. The offer in our silver market is the rate at which participants (you and any other clients) in the market are willing to accept to sell physical silver bullion. The difference between the bid and offer is known as the spread and dictates how efficient the market in question is. We believe the spread in our silver market is the most efficient you will find to buy silver online.
A financial instrument that carries the right, but not the obligation, to buy or sell another financial instrument or asset at a specific price within a specific period of time. Options contracts are traded in the over-the-counter market or the exchange-traded market by banks, brokers and other large financial institutions.
There are options contracts for speculators in gold and silver that are traded on international exchanges around the world. These contracts can be used by miners and other businesses within the gold and silver markets to hedge their exposure to the gold or silver price. The dates of gold and silver options expire each quarter, and the run up to these dates are keenly noted by market participants. Gold options, are like gold futures, in that they are derivatives linked to the gold price. As such gold options contracts are sometimes known as paper gold. This is because you do not own anything tangible, like a bar of gold bullion.
Gold options contracts expose investors to counterparty risk and are complicated financial instruments. As such many market commentators deem gold options a less suitable gold investment than physical gold bullion. You can read more about these issues in our gold investment guide.
Paper gold investments are investments where the investor does not own physical gold bullion, but a paper claim to gold bullion or an instrument linked to the gold price. Paper gold is often deemed an inferior gold investment than holding allocated gold bullion in a secure vault. You can read more about paper gold versus physical gold in our guide to gold investment.
Paper silver investments are investments where the investor does not own physical silver bullion, but a paper claim to silver bullion or an instrument linked to the silver price. Paper silver is often deemed an inferior silver investment than holding allocated silver bullion in a secure vault.
Acronym referring to Portugal, Ireland, Italy, Greece and Spain. These countries, that built up unsustainable debt levels under the European currency union, have become known as the ‘PIIGS’. These countries debt levels have become a great source of concern for the success of the Euro currency and the EU itself.
Pound cost averaging
Pound cost averaging (PCA) is buying a fixed sterling amount of a particular asset on a regular schedule regardless of the price. More is purchased when prices are low, and less is bought when prices are high.
PCA has often been recommended as a considered and useful way to buy gold bullion at a lower average gold price, and buy silver bars at a lower average silver price.
Read more about how PCA relates to gold and silver investment here.
Government mandated minimum or maximum prices that can be charged for certain goods and services. Governments sometimes implement price controls when prices on essential items, such as food or oil, are rising problematically.
There are two primary forms of price control:
1) Price ceiling – a maximum price that can be charged
2) Price floor – a minimum price that can be charged.
Economists mostly believe that price controls are counter productive and seldom accomplish what they were intended to do.
There have been price controls associated with the gold price in the past when gold was confiscated by the US government and US citizens were given a government determined price for their gold bullion.
The price discovery process is where the price of an asset in the marketplace is determined through the interactions of buyers and sellers. Price discovery is different from valuation. The price discovery process is often continuous, and hopefully transparent, and provides what is deemed ‘fair value’ for the asset in question. The price discovery process needs to function freely in a well functioning market.
For years some precious metals investors have raised grievances about an improper price discovery process occurring for gold and silver bullion. Investors, and agencies such as GATA, argue that the price discovery process has been improperly happening in the paper gold and silver markets which bear no reality to the physical bullion market. The paper gold and silver market is said to be 100+ times larger than global inventories of gold and silver bullion should allow. These investors urge the gold price therefore does not reflect fair value for physical gold or silver bullion. The same is said to occur in the silver market which sets the silver price. These investors urge that the paper and physical gold and silver markets are very different beasts, and that one should not set the price of the other. Some professional investors, such as Eric Sprott, have called out to suppliers of gold and silver bullion to act responsibly to help the physical markets reassert there apparent natural place of the physical market in price discovery for precious metals.
The above mentioned concerns about the paper markets setting a price that does not reflect fair value for gold and silver bullion do not even take into account what has been termed manipulation by the central and bullion banks over the years. Gold market heavyweights, such as the late Ferdinand Lips, have studied with great consideration the effect of planned and telegraphed gold sales and gold loans by central banks, and the opportunities that the Gold Carry Trade presented to bullion banks (when the Gold Lease Rate was lower than the risk free rate during the 1980s and 1990s). These factors are also deemed to have had an unnatural effect on the gold price.
Whilst debates about the issues above will continue, we believe it is safest to buy physical gold and silver bullion. You can read more in our guide to gold investment.
The price level is the average of current prices across goods and services produced in the economy. It refers to any static picture of the price of a given good, service or asset. The most common price level index is the Consumer Price Index (CPI).
According to Detlev Schlichter, author of Paper Money Collapse, the focus on the price level is understandable when one considers that the confidence in money’s purchasing power is the only backing fiat money has. If there is a decay in money’s purchasing power then we will see a complete loss of confidence in fiat money.
Austrian economists believe that the belief in the price level, as a measure of good money, has been the source of many dangerous policies and ideas. When there is an expanding money supply, it is clear that the demand for money also rises therefore the price level may remain fairly stable. This leads macroeconomists to believe that money injections are non-disruputive – a dangerous misconception.
As Detlev Schlichter says, ‘The statistical averages of prices may indeed remain fairly unchanged even after an injection of new money, but this does not mean that relative prices were not distorted by the money injection and therefore capital misallocations occurred.’
These money injections do not mean the rising supply and demand for money meet in the middle, as monetarists assume; this would be practically impossible. Money injections ‘distort interest rates and other relative prices and lead to suboptimal resource use,’ according to Detlev Schlichter. Therefore using the average price level as a measure of ‘good money’ are unable to capture the full effects of money supply expansion.
Governments no longer need to physically print money in order to inject cash into the economy. Quantitative Easing is an electronic version of money printing. The central bank buys assets which are typically made up of government bonds, securities, commercial paper and corporate bonds. The money used by the Central Bank to buy these assets is un-backed and created especially for this purpose.
Ratings agencies, sometimes called Credit Rating Agencies (CRA), are institutions that provide credit ratings for issuers of certain types of debt obligations, as well as the debt instruments themselves. On some occasions the owners or payers of the underlying debt are also given ratings. A credit rating for an issuer weighs the issuer’s credit worthiness (its ability to pay back the loan and not default), and affects the interest rate paid by the security or instrument in question.
The major ratings agencies are Standard & Poor’s (S&P), Moody’s and Fitch. These agencies assign a credit rating using their own scoring systems. S&P uses a system of alphabetic characters and + or – symbols; starting with the highest rating of AAA, typically going down through AA+, AA, AA-, A+, A, A-, BBB, BB+, and so on down to C. Moody’s uses a slightly different system of alphanumeric characters; starting with the highest rating of Aaa, going down through Aa1, Aa2, Aa3, A1, A2, A3, Baa1, and so on down to C.
Investors are then meant to use these ratings to assist their investments and allocation of capital. The value of ratings agencies has been widely questioned since the Credit Crunch. Credit ratings, in a range of circumstances, had been found to be highly inaccurate. The ratings agencies have been accused of anti-competitive practices, being affect by conflicts of interest, and have been subject to Federal investigation and much regulatory supervision. More recently the European sovereign debt crisis has once more exposed rating agencies as being at times highly inaccurate in their ratings of debt and securities. Investors are best described as taking credit ratings with a pinch of salt, and many prominent investors describe these agencies as laggards who are generally late, sometimes years late, in understanding market reality.
A range of high profile gold investors, such as Peter Schiff, Jim Rogers and Bill Bonner, are also highly critical of ratings agencies. One of the best analyses of the role credit ratings agencies played in the built up to the Credit Crunch is described by Gillian Tett, Editor of the Financial Times USA, in her excellent book ‘Fool’s Gold’.
A foreign currency held by central banks and other major financial institutions. A large percentage international trade in certain commodities, such as gold, silver, oil and iron ore, may be priced in the reserve currency, causing other countries to hold this currency to pay for these goods. Holding currency reserves can reduce exchange rate risk, as the purchasing nation will not have to exchange their currency for the current reserve currency in order to make the purchase.
The US dollar has acted as the international reserve currency since it overtook the pound in importance to international trade. Academics often cite this historical usurpation of the pound as occurring from 1920s to 1930s.
Although gold and silver are traded in many currencies the reference gold price or silver price investors will be most familiar with is quoted in dollars per troy ounce.
Or narrow banking. The opposite to fractional reserve banking. Each loan made must be fully backed by a deposit. “Capital subscribed by shareholders is the only source of funds for loans” Eichengreen, 2008.
A central bank regulation which states what fraction of deposits commercial banks must keep as reserves.
A place of safety for investors during periods of crisis and collapse.
Some investors believe that gold bullion can be considered as safe haven from declining confidence in the banking and currency system. Silver investment is sometimes considered in a similar light but with greater attendant volatility.
Seigniorage is the difference between the value of money and the cost to produce it. The term refers to the economic cost of producing a currency. If the seigniorage is positive, then the government will make an economic profit; a negative seigniorage will result in an economic loss.
Most currency issuers enjoy a positive seigniorage, and the higher denomination of note issued the greater the seigniorage can be. The Euro 500 note is the largest currency unit in circulation at the time of writing and brings the European Central Bank significant profits each year.
The professional silver investment market accepts as good delivery, silver bars of the following specification:
- The gross weight of a silver bar should be expressed in troy ounces in multiples of 0.10, rounded down to the nearest 0.10 of a troy ounce.
The silver bars should carry the following marks:
- Serial number
- Assay stamp of refinery
- Fineness, expressed to either three or four significant figures
- Year of manufacture (expressed in format YYYY)
- Optionally, the weight of silver can also be marked. This may be shown in either troy ounces or kilos
Minimum silver content
- 750 troy ounces (approximately 23 kilos)
Maximum silver content
- 1100 troy ounces (approximately 34 kilos)
- 999.0 parts per thousand of silver
Silver investor with a very strong degree conviction about the strengths and benefits of silver bullion as an asset class.
The Silver Eagle is the official silver bullion coin of the United States of America. First released by the United States Mint in 1986, it is struck only as a coin of one-troy ounce silver bullion. The Silver Eagle has a face value of one dollar and is guaranteed to contain silver bullion of 99.9% purity. The silver content, weight, and purity are certified by the United States Mint. The Silver Eagle has been produced at three mints: the Philadelphia Mint, the San Francisco Mint, and the West Point Mint.
Though we advocate keeping some gold and silver bullion coins at home for use in extremis, keeping anything more than a few hundred dollars in silver coin form is not necessarily advisable. For more substantial silver bullion investment we advocate that investors buy silver bullion that is stored in professional market vaults.
“A nonprofit international association that draws its membership from across the breadth of the silver industry. This includes leading silver mining houses, refiners, bullion suppliers, manufacturers of silver products and wholesalers of silver investment products. Established in 1971, the Institute serves as the industry’s voice in increasing public understanding of the many uses and values of silver”.
The Silver Institute’s research and industry information is often used and cited by participants in the silver investment market. For example – supply and demand data for silver bullion is essential to accurately understanding dynamics within the silver market. A more precise use of data from the Silver Institute would be in our analysis of how participants like the silver miners might be acting to support the physical silver market and thus the silver price over the long term. For more examples like this, and other uses of data from the Silver Institute, try our Comment & Analysis section.
Silver Maple Leaf
The Canadian Silver Maple Leaf is a silver bullion coin annually issued by the government of Canada. The Silver Maple Leaf coin has been minted by the Royal Canadian Mint since 1988. The face value of the 1 oz coin is 5 Canadian dollars, which gives the Silver Maple Leaf the highest currency value within internationally recognised silver bullion coins. The silver bullion purity of the coin is 99.99% silver, which is also the highest purity among other widely recognised silver bullion coins which have a 99.9% standard.
Though we advocate keeping some gold and silver bullion coins at home for use in extremis, keeping anything more than a few hundred dollars in silver coin form is not necessarily advisable. For more substantial silver bullion investment we advocate that investors buy silver bullion that is stored in professional market vaults.
Business or enterprise engaged in extracting silver from the earth’s crust and processing the mined material to the end product of silver bullion.
Silver is mostly mined as a secondary product from the extraction of other elements. For example, the world’s largest producing silver mine is the Cannington Mine in Australia that primarily produces lead and zinc.
Silver mining companies may chose to refine their extracted silver deposits into good delivery silver bullion before selling to the silver market, or may prefer to sell their extracted silver in doré bar form to a refinery.
The silver price is the rate at which silver trades in relation to a number of fiat currencies. The most referred to silver price is that quote in dollars per troy ounce. This dollar per ounce silver price has become the silver market’s reference price because the US dollar is the current international reserve currency. However, silver is not denominated only in US dollars, and is priced in every currency.
Investors can buy silver and sell silver in a range of currencies on our platform. To view past and present silver prices click here. To also learn about silver investment and the silver market, try our Comment & Analysis section.
Also known as hard money, honest money, commodity money. A form of money which is fully backed by a tangible commodity e.g. gold and silver. It has intrinsic value. For the majority of recorded history, countries have operated on a currency system of sound money. The use of sound money prevents governments from controlling and manipulating the money supply. Sound money allows the market to determine the quantity and quality of money.
“Sound money is the cornerstone of individual liberty. Sound money is metallic money. It is the gold standard” – Senholz, 1955.
However, if people do not have this choice, and are required to accept and use all money, good and bad, less valuable and more valuable, they will tend to hoard the money of greater perceived value in their possession, and pass on the bad money to someone else. This occurs under Gresham’s Law.
In the absence of legal tender laws, the seller will not accept anything but money of certain value (good money), and Thier’s Law will assert itself. Conversely, under the influence of legal tender laws buyers will opt to exchange the money with the lowest commodity value (bad money) as the creditor must accept such money at face value, and Gresham’s Law will assert itself.
Nobel prize winning economist Robert Mundell surmises this in his comment that “bad money drives out good if they exchange for the same price.”
Debt issued by a sovereign nation in order to finance itself. Governments usually borrow by issuing securities, government bonds and bills which are bought and sold in the bond market. Some creditworthy nations are less able to borrow from the private investors that make up the bond market. These less creditworthy nations may need to borrow directly from supranational organisations like the IMF or World Bank. As the government draws revenue from taxing its population, sovereign debt is an indirect debt of the taxpayers.
The bond market is where the world’s creditors lend money to the world’s issuers of sovereign debt at prices set by supply and demand for credit in the market. The European banking crisis that started in 2009 has resulted in the PIIGS initially having to pay far higher interest rates to bond buyers, and then to the bond market refusing to lend these nations any more money. The EFSF was established to provide a backstop these nations.
When talking about owning a nations debt (bonds) Amschel Rothschild famously quipped: “Let me issue and control a Nation’s money and I care not who makes its laws”.
Those that invest in gold are often concerned with levels of sovereign debt that debtor nations of the world are struggling to maintain. For more information about sovereign debt and stresses and strains in the sovereign debt market, try our Comment & Analysis section.
Sovereign wealth fund
A sovereign wealth funds (SWF) are state-owned investment funds that manage a sovereign nation’s foreign exchange reserves. SWFs invest globally in a range of assets. Some SWFs are managed by the central bank, which accumulates the funds in the course of its management of the banking system. Other SWFs are simply the state’s savings that are invested by private entities for the purposes of investment return. The delineation between centrally managed and independent SWFs can be difficult to establish; an example of this would be the SWFs of China.
Most nations that have SWFs are creditor nations that generate budget surpluses and sell more goods and services (eg – commodities, energy, manufactured goods) than they import, and thus need to manage these foreign exchange reserves. These assets are typically held in domestic and foreign reserve currencies such as the dollar, euro pound and yen, whilst gold bullion can be used as another form of savings and liquidity. Nations that run budget deficits, like many western nations, do not have SWFs. The extreme imbalances that display themselves in today’s monetary system, where some nations have accumulated vast reserves and others have built up huge debt piles, have prompted commentators to analyse whether our current system of freely floating fiat currencies is fit for purpose.
Some of the most notable SWFs (as listed by Wikipedia) are listed below:
Investors in the gold market have been particularly interested to monitor the gold investment activity of certain nations and their SWFs. A specific focus has been on the SWFs of China, which have been helping the Peoples’ Bank of China (PBOC) to buy gold bullion. Analysts believe that China’s accumulation of paper assets and government bonds means that its gold reserves make up a very small percentage of its reserves generally, and this has meant China has to buy a huge amount more gold to rebalance its reserves and to potentially prepare the Chinese currency as a new reserve currency. As a result China has become the main driver of demand in the gold investment market since the Credit Crunch of 2008.
Chinese gold accumulation by its SWFs caught the attention of the investment community in 2009 when after five years of accumulating gold the State Administration of Foreign Exchange transferred 500 tonnes of gold bullion to the PBOC in a single accounting transaction. In addition to its significant disclosed gold investments, China may be executing a parallel covert strategy to accumulate greater gold reserves without moving the gold price up too much whilst doing so.
For more information about SWFs and the gold investment market try our Comment & Analysis section.
The spot price is the current price at which a commodity can be bought or sold at a specified time and place. When you buy a physical commodity this is the reference price that is of most interest to you. For example – if you wanted to buy gold bullion from the physical gold market you would be most concerned by the current spot price of gold when making your gold investments. Naturally the spot price of silver would be your reference point when wanting to buy silver bullion.
The Real Asset Company delivers an efficient marketplace for precious metals investors to buy gold bullion bars extremely close to the current gold spot price. For more information look at our gold investment market and note how efficient our spreads are to buy and sell.
The difference between the bid and the offer price of a security or asset in a market place. The more efficient or narrow, the spread, the more efficient it is for investors to buy and sell the asset in question.
The spread is important for gold investment as an efficient spread means you are able to buy more gold for your money when you enter the investment position, and then sell your gold for more money when you exit your investment position. Take a look at our gold investment market to see how efficient our spreads are. We believe the spread in our gold market is the most efficient you will find to buy gold online. The spreads in our silver, platinum and palladium markets are all typically extremely efficient and an attractive way to buy and sell precious metals.
Spread betting is where gamblers wager on the outcome of an event, often a financial event, where the pay-off is based on the accuracy of the wager, rather than a simple “win or lose” outcome. Spread betting has grown rapidly in recent years with the efficiency of the betting process and range of bets available proving attractive. However, spread betting carries a high level of risk, and gamblers can potential lose far in excess of their stake. As a result, in the UK spread betting is regulated by the Financial Services Authority rather than the Gambling Commission.
Spread betting on the gold price can be a way for market participants to get exposure to gold. However this is far from owning a tangible gold investment of physical gold bullion. When you make a spread bet on the gold price you essentially own nothing more than a financial bet with a counterparty who may not be able to redeem your bet when you most need it. Spread betting the gold price is thus more speculative than owning physical gold as it involves large amounts of leverage. For more information about spread betting versus owning gold bullion, read our guide to gold investment.
Store of value
A store of value is an asset or commodity that has intrinsic value. An asset that is a store of value can be stored and retrieved over time. Money needs to be two things to be good money: it needs to be an efficient medium of exchange, and also a good store of value. This essentially means that money needs to efficiently facilitate trade, but also needs to be able to store the value of a day’s labour to be realised later. The store of value properties of money are important because this makes money a good savings mechanism. As long as a currency is relatively stable in its value, money can be used to store our savings.
Our current monetary system is based on a system of freely floating fiat currencies. Fiat money, or paper money, is an excellent medium of exchange, but unfortunately is a very poor store of value. This is because fiat currency systems are inherently inflationary and too open to abuses by the authorities and central bankers. Fiat money only has value by decree of government and retains its value only whilst investors have faith in the government and financial authorities.
For most of human history the best forms of money have been commodity money. The commodities most often used to back our money has been gold and silver bullion. The rarity of gold and silver have ensure the value of our money. Sound money backed by gold and silver is an excellent store of value, and also important for our liberty and social progress. It is for this reason that gold investment should first be seen as a way of saving and preserving your capital, before expecting any capital appreciation on the value of your gold bullion.
For more information about today’s monetary system, stores of value, and how this involves gold and silver, try our Comment & Analysis section.
The strong hands in an investment market can be said to be those who are most able to endure price volatility and those most able to sit through extended periods of stress and anxiety. Strong hands are able to sit through times when their investment may be temporarily underwater, in the expectation of higher prices and profits down the road.
The strong hands in the gold market could be said to be those that own physical gold bullion without any leverage. This means that these investors can hold onto their gold investment position more easily and are not as exposed to short term changes in the gold price. Volatility and price corrections are part and parcel of life when you invest in gold. This is way we believe it is best to ensure that your gold investment product allows you to act as a strong hand in the market, and not to get shaken out of your position and belief by the short term noise and price action of the market. It is far easier to ride a long term investment trend when you hold with strong hands. For more information about where The Real Asset Company fits into this read our guide to gold investment.
‘Talking heads’ is a generic term used to refer to faces and commentators in the mainstream financial media. The host and link roles on networks such as CNBC could be described as Talking Heads. These individuals have to know enough about a great range of subjects within the financial markets to be able to interview and interact with specialist market participants. Talking heads often have an excellent general but high level financial knowledge, but are not specialists. There are very few journalists and presenters with a specialist understanding of gold investment, although as the late gold market heavyweight, Ferdinand Lips, points out, it was not always like this. Maria Bartiromo, of CNBC, is perhaps the most famous of Talking Head, and is respected and liked amongst the financial community.
Due to potentially not being well versed in the finer details of some market activities, the phrase Talking Heads can be used is a slightly derogatory fashion. Legendary investor Jim Rogers sometimes refers to Talking Heads in such a derogatory way. Gold investors who are well versed in gold and monetary history may find the mainstream media’s and Talking Heads’ opinions on gold a little lightweight and potentially wrong headed. Have a look at this interview with gold investment expert, Ben Davies (CEO of Hinde Capital), and the presenters on CNBC, as Ben discusses the gold price and a potential return to a gold standard. We interviewed Ben Davies in February 2012 to hear his sought after opinions on why people invest in gold, and how he found his way to into the gold market from a previous life as a proprietary trader in the fixed income markets: watch Ben’s interview here.
Thiers’ Law is the reverse of Gresham’s Law, where good, trusted money drives out bad undesired money whenever the bad money is untrusted and of questionable value. Thiers’ Law was named by monetary economist Peter Bernholz, in respect of French politician and historian Adolphe Thiers.
Thiers’ Law requires the absence of legal tender laws. Given the choice of what money to accept people will transact with money they believe to be of highest quality and long-term value. However, if due to legal tender laws citizens are not given this choice, and are compelled to accept preferable and less preferable money, they will tend to hoard the money they prefer and pass on the less preferred money to someone else.
Nobel prize-winning economist Robert Mundell believes that Gresham’s Law could be better surmised as: “Bad money drives out good if they exchange for the same price.”
An example of Thiers’ law would be where gold backed money drives untrusted paper money out of circulation.
The general direction of a market or of the price of an asset class. Trends vary in duration from short, intermediate, and long term. Identifying a trend can be highly profitable, because you will be able to trade with the trend. It is akin to investing with the wind at your back.
A number of prominent gold investors, such as Eric Sprott, John Hathaway, James Dines, and Ferdinand Lips, identified 2000 as the start of a bull market in gold and many future years of a rising gold price. Such investors believed that certain phenomena had occurred to suppress the gold price over the last 10 to 15 years, such as the end of central bank gold sales and gold loans, and that gold investment would grow due to a lack of confidence in the financial and monetary system. These investors believed that the gold and silver price had entered long term bull trends.
You can read more analysis and evaluation about the merits of gold and silver investment, and future directions of the gold and silver prices, in our Comment & Analysis section.
The industry standard for measuring gold’s weight. It is equal to 0.0311034768 kg = 31.1034768 g.
The unit of gold bullion accepted by the professional gold market is the good delivery bar, which can weigh between 350 and 430 troy ounces, or around 12.5 kilos.
UK gilt market
A ‘gilt’ is a UK Government bond priced in sterling. These gilts are issued by HM Treasury and listed on the London Stock Exchange. The term “gilt” or “gilt-edged security” is a reference to their apparent security. Some investors may not feel this sovereign debt is as safe as previous eras when government debt levels were lower.
The gilt market is comprised of two different types of securities – conventional gilts and index-linked gilts – which between them account for around 99% of gilts in existence. Gilts are often a favourite of institutional investors needing to preserve large pools of capital.
The good is still the property of the bank, therefore it carries counter-party risk and is not protected from the insolvency of the bank.
Within gold investment there is a huge difference between allocated and unallocated gold. When you invest in gold you typically want to own a tangible asset that is outside of the leveraged financial system and free from counterparty risk. When you buy gold using our platform you buy allocated gold that you hold legal title to. To learn more about the importance of holding allocated gold bullion try our guide to gold investment.
US treasury market
A ‘treasury’ is a US Government bond priced in dollars. These treasuries are issued by the United States Department of the Treasury. These instruments are backed by the “full faith and credit” of the US government and have been considered one of the safest investments in the world. Some investors may not feel this sovereign debt is as safe as previous eras when government debt levels were lower.
The treasury market is comprised of two different types of securities – conventional treasuries and index-linked treasuries – which between them account for around 99% of treasuries in existence. Treasuries are often a favourite of institutional investors needing to preserve large pools of capital.
Value at risk
Value at risk (VaR) is a method used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities.
VaR is commonly used by banks, financial institutions and other market participants to measure risk while it happens and is an important consideration when firms make trading or hedging decisions.
Value investing is an investment school stemming from the ideas Benjamin Graham and David Dodd taught at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Value investing generally involves buying securities or assets whose values appear under priced by some form of fundamental analysis. Such securities may be public companies that trade at discounts to book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
Notable advocates of value investing include Warren Buffett, who argue that investors need to buy securities or assets at less than what their rigorous analysis deem to be their intrinsic value. Mr Buffett is often cited as a commentator on the gold market and the direction of the gold price. His opinions and comments attract a lot of analysis and criticism from gold market specialists. You can find more on Mr Buffett and his thoughts on gold investment in our Comment & Analysis section. Some of Mr Buffett’s comments are surprising given that his father, Senator Howard Buffett, was apparently his biggest hero and influence. Howard Buffett understood why one should invest in gold and in America was one of his era’s greatest advocates for sound money.
The amount of uncertainty or risk about the size of changes in an asset’s value. Higher volatility means that price can potentially be spread out over a larger range of values. This means the price of an asset can change dramatically over a short time period in either direction. Lower volatility means an asset’s price does not fluctuate dramatically, but changes more steadily. There is some degree of volatility in the gold price, and significantly more in the silver price; you only need to study price charts for gold and silver to see this.
Volatility could be said to affect silver investment more than gold investment as the silver price typically demonstrates larger relative price rises and falls than that of the gold price. Volatility is something that investors in precious metals need to understand to be able to hold their invest positions through price corrections.
Those market participants who are vulnerable to being shaken out of their investment positions due to short term volatility or price drops. Market participants that use significant amounts of leverage to hold their positions and are less able to keep a long term view. Weak hands in the gold market might be considered investors that own gold derivatives using large amounts of leverage. Stronger hands might be consider those that invest in gold bullion, without using leverage, who are able to handle gold’s sometimes volatile nature.
If you are looking to save in gold, or cautiously invest in gold over the long term, you may well be best served to buy gold bullion bars without any leverage or margin. You can read more about these issues in our guide to gold investment.
World Gold Council
“The World Gold Council is the market development organisation for the gold industry. Working within the investment, jewellery and technology sectors, as well as engaging in government affairs, our purpose is to provide industry leadership, whilst stimulating and sustaining demand for gold.”
The World Gold Council (WGC) is a non-political organisation that aims to promote gold, that is financed by the 24 largest gold mining companies. The WGC’s research about gold investment is well respected and is closely analysed and discussed within the gold market. The WGC’s gold investment research is designed to inform investors about the dynamics of the gold market and about the investment properties of gold bullion as an asset class. A number of high profile gold analysts and commentators, such as Marcus Grubb, work for the WGC. The WGC’s gold market research is regularly enjoyed by The Real Asset Company, and you can find our analyses of notable pieces in our Comment & Analysis section. For example – in November 2011 we analysed the WGC’s gold market update to ask whether gold was moving closer to reserve currency status. Experienced participants within the gold market have interesting views on the role and effectiveness of the WGC; gold investors might be interested to read Swiss banker Ferdinand Lips’ thoughts on this in his seminal book to gold investment – ‘Gold Wars’.