School of Social Science

Semester 1, Academic Session 2013/2014

SEP403E SEMINAR IN CONTEMPORARY ECONOMIC ISSUES

The Future of Gold

Seminar Coordinator:

Dr. Saidatulakmal Mohd

Members of Group 7:

Cheah Chun Keong 113105

Chuah Ren Hong 113111

Jayson Ooi Boon Lin 113119

Ong Ying Chong 113152

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Table of Contents

1.0 Introduction 4

2.0 Uses of Gold 5

2.1 Gold in Jewellery 5

2.2 Gold in Electronics 5

2.3 Gold in Religion 6

2.4 Gold in Medical 6

2.5 Gold in Monetary 7

2.6 Gold in Food 7

2.7 Gold in Investment 7

2.7.1 Gold Bar 8

2.7.2 Gold Bullion Coin 8

2.7.3 Gold Certificate 8

2.7.4 Gold Exchange-Traded Fund 9

2.8 Demand for Gold 9

3.0 Factors Affecting the Gold Price 10

3.1 Inflation 10

3.2 Interest Rate 10

3.3 US Economy and the Dollar 11

3.4 World Instability 11

3.5 Other Investment Alternatives 11

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3.6 Demand for Gold 12

3.7 Mining Supply of Gold 12

3.8 Central Bank Policy, World Currencies 13

3.9 Futures Market, Manipulation 13

4.0 Trend of Gold Price 14

4.1 Reason of Increase in Gold Price 14

4.1.1 Inflation Fears 14

4.1.2 Debt Worries 15

4.1.3 Market Demand 16

4.1.4 Speculation 17

4.2 Why Gold Price Decreases Since Year 2012? 18

4.3 Pros and Cons of Gold As an Investment 19

5.0 Is There an Alternative of Gold? 23

6.0 Conclusion 26

7.0 Bibliography 28

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1.0 Introduction

Of all the minerals mined from the Earth, none is more useful than gold. Gold is a

chemical element with the symbol Au and atomic number 79. Its usefulness is derived

from a diversity of special properties. Gold conducts electricity, does not tarnish, is very

easy to work, can be drawn into wire, can be hammered into thin sheets, alloys with

many other metals, can be melted and cast into highly detailed shapes, has a wonderful

colour and a brilliant luster.

This metal has been a valuable and highly sought-after precious metal for coinage,

jewellery, and other arts since long before the beginning of recorded history. Gold

standards have sometimes been monetary policies, but were widely supplanted by fiat

currency starting in the 1930s. The last gold certificate and gold coin currencies were

issued in the U.S. in 1932. In Europe, most countries left the gold standard with the start

of World War I in 1914 and with the huge war debts, gold did not return as a medium of

exchange. Throughout the history of our planet, almost every established culture has used

gold as store of value, to symbolize power, beauty, status, purity and accomplishment.

The value of gold is rooted in its medium rarity, easily handling, easy smelting, non-

corrosiveness, distinct colour and non-reactiveness to other elements which is the

qualities that most other metals lack. Today, we continue to use gold for our most

significant objects such as wedding rings, Olympic medals, Oscar’s award, jewellery and

ecclesiastical art. No other substance of the same rarity holds a more visible and

prominent place in our society.

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2.0 Uses of Gold

2.1 Gold in Jewellery

Gold has been used to make ornamental objects and jewellery for thousands of

years. Gold nuggets found in a stream are very easy to work and were probably one of the

first metals used by humans. Today, most of the gold that is newly mined or recycled is

used in the manufacture of jewellery. About 45% of the gold consumed each year is used

in the manufacture of jewellery. Special properties of gold make it perfect for

manufacturing of jewellery. This is because gold had a very high luster desirable yellow

colour, tarnish resistance, ability to be drawn into wires, hammered into sheets or cast

into shapes. These are all properties of an attractive metal that is easily worked into

beautiful objects.

Pure gold is too soft to cast into jewellery items. Craftsmen learned that alloying

gold with other metals such as copper, silver, and platinum would increase its durability.

Since then, most gold used to make jewellery is an alloy of gold with one or more other

metals. The alloys of gold have a lower value per unit of weight than pure gold. A

standard of trade known as carat was developed to designate the gold content of these

alloys. Pure gold is known as 24 carat gold and is almost always marked with "24K". An

alloy that is 50% gold by weight is known as 12 carat gold (12/24ths) and is marked with

"12K". An alloy that contains 75% gold by weight is 18 carat (18/24 = 75%) and marked

"18K". In general, high carat jewellery is softer and more resistant to tarnish while low

carat jewellery is stronger and less resistant to tarnish especially when in contact with

perspiration.

2.2 Gold in Electronics

The most important industrial use of gold is in the manufacture of electronics.

Solid state electronic devices use very low voltages and currents which are easily

interrupted by corrosion or tarnish at the contact points. Gold is the highly efficient

conductor that can carry these tiny currents and remain free of corrosion. Electronic

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components made with gold are highly reliable. Gold is used in connectors, switch and

relay contacts, soldered joints, connecting wires and connection strips.

A small amount of gold is used in almost every sophisticated electronic device.

This includes such as cell phones, calculators, personal digital assistants, global

positioning system (GPS) units and other small electronic devices. Most large electronic

appliances such as television sets also contain gold. One challenge with the use of gold in

electronic devices is the loss of the metal from society due to very little gold that has

been used in electronic devices is recycled. For examples, a billion cell phones are

produced each year and most of them contain about fifty cents worth of gold. Although

the amount of gold is small in each device but if the number of the gold in each device

was to be added up, it will be a lot of gold that is not recycled.

2.3 Gold in Religion

An important colour in Buddhist mysticism is gold. The statues in Buddhist are

often painted with gold. Gold symbolizes the Sun and Fire in Buddhism. Even though

Buddhist aesthetics theorizes gold colour to be used primarily for their conventional

symbolic significance, in practice, it recognizes their powerful emotive effect.

2.4 Gold in Medical

Gold is used as a drug to treat a small number of medical conditions. This is

because particles of a radioactive gold isotope are implanted in tissues to serve as a

radiation source in the treatment of certain cancers. Besides that, small amounts of gold

are used to cure diseases known as Lagophthalmos. Lagophthalmos is the inability of a

person to close their eyes completely. This condition is treated by implanting small

amounts of gold in the upper eyelid. The implanted gold "weights" the eyelid and the

force of gravity helps the eyelid close fully. Besides that, gold can also be used in beauty

product. This is because gold is praised for its ability to ward off UV damage, tighten lax

skin and reduce the appearance of discolouration. Some believe it can also slow down the

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breakdown of elastin, keeping skin firm. Study also shows that gold helps to increase the

blood circulation, eliminating toxins from the body and speeding up the tissue repair.

2.5 Gold in Monetary

One early printings of paper money were backed by the gold held in safe keeping

for every unit of money that was placed in circulation. The United States once used a

"gold standard" and maintained a stockpile of gold to back every dollar in circulation.

Under this gold standard, any person could present the paper currency to the government

and demand in exchange of an equal value of gold. The gold standard was once used by

many nations but it is eventually become too cumbersome and is no longer used by any

nation. The gold used as the financial backing for currency was most often held in the

form of gold bars.

2.6 Gold in Food

Do not be surprise that gold can be used in food too. Edible gold flakes have been

used to decorate a vast range of culinary creations. Gold flakes are completely harmless

when eaten and there is zero chance of the gold causing an allergic reaction. However,

gold flakes are tasteless and indigestible by human digestive system.

2.7 Gold in Investment

Of all the precious metals, gold is the most popular as an investment. Investors

generally buy gold as a hedge against social fiat currency crises, inflation, war, and social

unrest. There are several ways that people can choose to invest in the commodity of gold:

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2.7.1 Gold Bars

Purchase of gold bars is one of the easiest ways to invest in gold. There is a

number of gold dealers that specializing in supplying gold bars and the gold bars tend to

be available with very low premiums, particularly if people are buying it through the

internet. Purchasing gold bars through the internet is more straightforward and it is easy

to compare the prices of different online gold dealers to get the best deal possible.

2.7.2 Gold Bullion Coins

Purchase of gold bullions coins is another simple way to invest in gold. With gold

bars, there are plenty of gold dealers that offer a wide selection of gold coins for sale.

Buying gold coins online is usually the cheapest way to make such purchases. Gold

bullion coins are a great option for anyone looking to invest in gold, no matter what

budget is involved.

2.7.3 Gold Certificates

Gold certificates is one of excellent way to buy gold without the complications of

having to actually take delivery of a pile of gold and then store it and look after it.

Certificates are issued by individual banks that confirm the ownership of a specified

amount of gold, while the bank itself remains in possession of the metal in its vaults.

Banks which issue gold certificates generally offer two options – certificates for allocated

account or unallocated accounts. There is a significant difference between these two

types of accounts. An allocated gold account means that there is a certain amount of gold

held that directly correlates to the certificate. This means that those gold bars cannot be

allocated to anyone else or used for any other purpose by the bank. On the other hand, an

unallocated account means that those gold bars can be allocated to anyone else or used

for any other purpose by the bank. This means that if banks experiences a large lost on its

gold investment then an unallocated account holder could potentially lose some or all of

your investment.

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2.7.4 Gold Exchange-Traded Fund

Gold Exchange Traded Funds are perhaps more similar with investing on the

stock markets than Gold Certificates and Gold Bars. An exchange traded fund (ETF) is a

form of investable security that tracks a particular index, commodity or group of assets.

Exchange traded fund are similar to index funds, that can be bought and sold on

exchanges in the same way as stocks in public companies. Just like stocks, its price can

fluctuate on a daily basis.

2.8 Demands for Gold

Based on World Gold Council analysis, it shows that about 45% of the yearly

gold demand comes from jewellery, 45% comes from investment gold bullion, 9% comes

from industrial demand and 1% of the yearly gold demand from others uses such as gold

in food, gold in beauty products, gold in religion, gold in medical and etc.

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3.0 Factors Affecting the Gold Price

There are many factors claimed to have influence on the gold price provided by

many different sources. A few accountable factors will be discussed to show its relation

with the gold price.

3.1 Inflation

Inflation is defined as the rate at which the general level of prices for goods and

services is rising and subsequently the purchasing power is falling. Central banks attempt

to stop severe inflation or severe deflation to keep the growth of prices in a more constant

and lower rate. Inflation is regarded as the top factor that affecting the gold price. In an

inflationary environment, when the value of paper currency is decreasing where consumer

can buy lesser items with the same amount of money, consumer would look for another

form of assets which retain its value such as gold. For this particular reason, gold price is

positively correlated with the inflation.

3.2 Interest Rate

Interest rate is another major indicator for the gold price. Interest rate is the

amount charged, expressed as a percentage of principal by a lender to a borrower the use

of assets. Interest rates are typically noted on an annual basis, known as the annual

percentage rate (APR). At the time of high interest rate, people would deposit their

money in bank to receive a constant high interest payment at almost no risk. High interest

rate does not favour gold price, which means the higher the interest rate, the lower the

gold price. Thus, gold price is negatively correlated with the interest rate.

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3.3 US Economy and the Dollar

The health of US economy and the strength of dollar would have significant

effects on the gold price. There are several indicators to look at when measuring the

health of US economy which are balance of trade and debt. Balance of trade involves the

money going in and out from the country. If a country produce desirable goods which

highly valued by the other countries, then the country would probably have a surplus in

balance of payment and its currency would be appreciated because the holding of the

currency provides attractive possibilities. US debt has the impact on the credibility of the

dollar as a reserve currency worth owning, if the US debt gets bigger and unmanageable,

then the other countries would not want to own the dollar because of the high risk on it.

Thus, the worse the health of US economy, the lower the value of dollar, then the higher

the gold price. Gold price is negatively correlated with the US economy and the dollar.

3.4 World Instability

In the event of terrorist attack, war or some other crisis, gold ownership is preferred and

is appreciated. The current financial system such as fiat paper currencies, stock markets

and debt fueled growth can only operate under a peace environment. When situation

starts to get bad, people would want to store gold because gold is known to preserve

value and trust even in the most uncertain of times. Thus, the higher the instability of the

major world event, the higher demand in gold, which would lead to a higher gold price.

3.5 Other Investment Alternatives

In the event of terrorist attack, war or some other crisis, gold ownership is

preferred and is appreciated. The current financial system such as fiat paper currencies,

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stock markets and debt fueled growth can only operate under a peace environment. When

situation starts to get bad, people would want to store gold because gold is known to

preserve value and trust even in the most uncertain of times. Thus, the higher the

instability of the major world event, the higher demand in gold, which would lead to a

higher gold price.

3.6 Demands for Gold

The data gotten from the internet shown that about 45% of yearly gold demand

comes from jewellery, about another 45% from investment bullion and about 10% from

the industrial demand. If any of these areas having great surge in its demand, then the

gold demand would follows and the price of gold would increase. With China and India

providing much of the fresh demand for gold, the economic conditions of these countries

play an important role in determining the gold demand and then the gold price.

Undoubtedly, the higher the gold demand, the higher the gold price.

3.7 Mining Supply of Gold

Supply contractions or new findings of gold mines can affect the price of gold. At

the same time, the gold has become harder and more expensive to mine, these make its

supply decreases. The increasing population growth and gold demand surpasses the gold

supply, makes the gold becoming more and more precious. The gold price would be

appreciated as the gold supply is decreasing.

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3.8 Central Bank Policy, World Currencies

Central banks around the world have the influence on the gold price. Central

banks always control the interest rate and the money supply to affect the inflation rate.

How much gold that central banks keep also play a role, there are many central banks

decreased their gold as reserves in the last several decades. In short, gold will always

serve as a great hedge towards poor economics. Appreciation in currencies of major gold

consumers like the Indian Rupee and the Chinese Yuan would increase the consumers’

purchasing power and the gold seems to be cheaper to them. Thus, the appreciation in

currency of major gold consumers would favour the price of gold.

3.9 Futures Market, Manipulation

The futures market of gold turned gold into a form of speculative commodity

where traders can speculate to gain a higher profit. The manipulation of the gold price

can be done by opening short or long positions in the futures market of gold. These can

affect the gold price in short term but over the long term, the factors mentioned from 1 to

8 should be highly accountable for the movement of gold price.

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4.0 Trend of Gold Price

Source: USA GOLD, 2012

As what we can see from the graph, the price of gold grows sharply since year

2008 until 2011. What factors drive the price of gold sharply?

4.1 Reason of Increase in Gold Price

4.1.1 Inflation Fears

An investment can be considered as a hedge against inflation when the investment

provides protection against the decreased value of currency. An inflation hedge typically

involves investing in an asset that is expected to maintain or increase its value over a

specified period of time.

One of the functions of gold is to hedge to inflation and a store of value. During

the period of US Financial Crisis and Eurozone Debt Crisis, the value of US dollar and

Euro has been devalued. In other word, American and European face the problem of

import inflation and their buying power has been decrease. Besides, a collapse in real

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estate or property prices has also lowered the appeal for residential and commercial

property. Gold’s value, in terms of the real goods and services that it can buy, has

remained remarkably stable for centuries. Hence investors often rely on gold to counter

the effects of inflation and currency fluctuations.

4.1.2 Debt Worries

Eurozone countries have been affected by Euro Crisis since year 2009. Euro crisis

refers to a combination of euro countries’ government debt crisis, a Eurozone banking

crisis and a growth and competitiveness crisis.

Worries were started when the Greece government was underreporting the budget

deficit. In other word, Greece government doesn’t have enough revenue to finance its

expenditure. As a result, Greece government seeks for help from IMF and IMF pumps in

USD 43 billion to paid for the Greece loan. The crisis subsequently spread to Ireland and

Portugal, while raising concerns about Italy, Spain and the European banking system, and

more fundamental imbalances within the Eurozone.

Besides that, US debt ceiling for year 2011 and year 2013 also result in debt

worries. US debt ceiling is the limited amount of national debt which can be issued by the

US government. The amount debt ceiling only can be raised by Congress after advised by

Treasury. The United States nearly reached the point of default on public debt in year

2011. Congress delayed the raise of debt ceiling and resulted in the first downgrade in the

United States credit rating. As a consequence of downgrading credit rating, US stock

market has suffered for a sharp drop. Luckily, Congress raised the debt limit with the

Budget Control Act of 2011 and debt default was avoided.

In year 2013, another debt ceiling crisis again when the ceiling was reached again.

The 2013 crisis began in January 2013 and ended on October 17. Once again, Congress

delayed the raise of debt ceiling in due to political debate between the Democratic Party

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and the Republican Party. However, the 2013 crisis was resolved after the Congress

raised the debt ceiling to USD 16.699 trillion.

As a result of debt worries, the global economy has been fuelled with

uncertainties. Eurozone and US economic condition became worse off after US financial

crisis on year 2008. Euro and US dollar suffer from devaluation. Stock market of US and

Eurozone suffer for huge drop. Investors lack of confidence in the investment of stock

market and bond market. These fears have also driven demand for gold as an investment,

and it is seen as a refuge from uncertainty and volatility in other investment classes.

Therefore, it drives the gold price up sharply from year 2008.

4.1.3 Market Demand

Emerging market demand for gold has also been strong. India is one of the top

consumers of gold, as its citizens like to buy gold jewellery and gold for investment

purposes. In 2012, India was the largest market for gold jewellery in the world,

representing a staggering 552.0 tonnes of gold in 2012. Based on a report published on

January 2013 by the U.S. Geological Survey, the total production of gold in year 2012

was 2700 tonnes. In other words, India demands and consumes about 20% of gold

production in the world. India’s culture and mythology embrace gold and the Indian

demand gold for the purpose of weddings and jewelry.

At the same time, the demand of gold in China also appeals been quite strong.

Same as Indian, the Chinese demand gold for the purpose of jewellery too. Besides,

Central banks and multinational organisations are holding gold as reserve. Table 1 shows

the total amount of gold hold by country or organization as their reserve:

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Rank Country/Organization Gold

(tonnes)

Gold's share of national

forex reserves (%)

1 United States 8,133.5 70

2 Germany 3390.6 66

3 International Monetary Fund

2814.0 N.A.

4 Italy

2,451.8 65

5 France

2,435.4 65

6 China

1,054.1 1

7 Switzerland

1,040.1 8

8 Russia

1,015.4 N.A.

9 Japan

765.2 2

10 Netherlands

612.5 52

Source: World Gold Council

Table 1: Amount of Gold Hold by Country / Organization as Reserve.

As what we can observe from the table, many countries such as United State,

Germany, Italy, France and Netherlands hold gold as a big portion of their reserve.

4.1.4 Speculation

The most recent rally in gold was attributed to speculation that China would begin

diversifying its trillions of dollars in foreign exchange reserves into precious metals

including gold. China suffered for devaluation on its reserve after US financial crisis and

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debt worries in Eurozone. This is because China hold large portion of US dollar as its

reserve.

According to Wikipedia, Foreign exchange reserves of the People's Republic of

China, China holds USD 3.3trillion in value of total reserve. US dollar holdings make up

60% of China reserve while Euro and British Pound occupy 20% of China reserve

respectively. As US dollar and Euro suffered for devaluation, China plans to change the

portion of US dollar and Euro to smaller portion of its reserve. At the same time, China

would like to increase the holding of gold as its reserve. Just imagine what will happen to

the price of gold when China converts quarter of its total reserves to gold holding.

Therefore, investors and speculators bought gold due to speculation of increase in

gold price during the period year 2008 to year 2011.

4.2 Why Gold Price Decreases Since Year 2012?

People usually invest in gold due to bad economy condition. Devaluation of

currency, loss in FOREX, stock and bond market causes the investors to change their

investment strategy to investment in metal especially gold. But if such concerns have

pushed people to buy gold since the global economic crisis started in 2008, recent events

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are giving them cause to reconsider. Many investors believed that the gold market is

entering a prolonged bear market after the price of gold peaked highest level at $1895/oz

on 6 Sept 2011. As what we can see from the graph, the price of gold is continue to

decline after September of 2011.

Besides, U.S. Federal Reserve will scale down its stimulus program or also

known as quantitative easing (QE). Ben Bernanke, Federal Reserve Chairman Ben

Bernanke announced that if the U.S. economy and job market continue to improve, the

Federal Reserve could begin to reduce its current massive injections of $85 billion

amount of QE will be reduced when US economy start to recover. This means that there

is less money to pump into US economy and US dollar will be strengthening again.

There are some signs showing that world economy is starting to recovery. As the

world economy started to recover, On 6 December 2013, US government make

announcement that unemployment rate hits the lowest rate 7.0% after the US financial

crisis in year 2008. On the same day, US government announced that consumer sentiment

surged in December as Americans' outlook on the economy and job prospects improved.

Besides, good news from Eurozone such as British house prices continued to climb,

German growth estimates were revised marginally upwards and France’s trade deficit

eased also showing a sign of world economy recovery. Over Asia countries, Japan’s

index of leading economic indicators rose and Malaysia’s trade surplus widened. These

signs results in drop of gold price because investors switch their investment on gold to

other investment market such as FOREX, stock and bond market. Investors believe that

revenue on investment in other asset will bring higher revenue or returns to them. Hence,

the demand on gold investment has been reduced and the price is dropped.

4.3 Pros and Cons of Gold As an Investment

Everything in this world has pros and cons and this include gold as well. There

are many pros of gold as an investment such as the high liquidity of gold, the stability of

the value of gold, gold can act as a hedge against inflation, gold as portfolio

diversification, universally desired investment and the usage of gold.

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The first pro of gold as an investment is the high liquidity of gold. The high

liquidity of gold enables gold to be easily converted into cash anytime and anywhere in

the world. This means that if you had invest in gold and now facing financial problem,

you will be able to sell the gold to other investor without difficulty in order to regain your

financial.

The second pro of gold as an investment is the stability of the value of gold. Gold

had been maintaining its value over the time. The economists had argue that even the

price of gold is not indicative to the gold value which mean that the changes of the price

of gold will not affect the value of gold such as the decrease in price of gold will not

affect the value of gold very much. The most properly reasons to this is that there is a

fixed quantity of gold due to the fact that gold is a commodity. Unlike U.S. dollar which

is a form of fiat currency that hold no inherent value.

The third pro of gold as an investment is gold can act as a hedge against inflation.

The reason behind this is because the value of gold rises when inflation takes place. Since

gold is priced in U.S. dollars, then any deterioration in U.S. dollar will lead to a higher

price of gold. Therefore, gold is more stable and better than cash as investment during

inflationary times.

The next pro of gold as an investment is gold as portfolio diversification. A wise

investor will not invest in one investment but will diversify his/her portfolio by investing

in different securities as this action will help to lower the overall risk of the investments.

Besides that, gold often moves inversely to the stock market and currency value which it

provides an especially effective way to diversify.

The other pro of gold as an investment is gold is a universally desired investment.

This is because gold is universal commodity which is not subject to political chaos unlike

other universal commodity such as currency futures, treasuries and other securities

around the world which are subject to political chaos. This means that when the politic in

a country is becoming chaos, there is still demand of gold in the market although the

other universal commodity such as currency futures, treasuries and other securities

around the world is unfavourable due to unstable value.

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Lastly, the pro of gold as an investment is the usage of gold as input in products.

Gold had been use as an input in the production of various products such as jewellery and

electronics for a long period of time. Therefore, there is a reliable demand of gold that

will stabilize the price of gold which makes gold good as an investment. Furthermore, as

times passes, the demand of gold keeps increasing and this will further stabilize the price

of gold and might force the price of gold to go even higher.

There are some cons of gold as an investment such as gold does not earn passive

income, gold can create a bubble, the need of physical storage and insurance, capital

gains tax rates are higher on most gold investments and increasing in gold value coincide

with the local currency devaluation.

The first con of gold as an investment is that gold does not earn passive income.

This is because the only returns to the investors that can be make out of gold is when the

value of gold increases and the gold is sold to the others investor. On the other hand, the

other investments such as stocks and bonds can derive a portion of their value from

passive income in term of dividends. Therefore, the investor of stocks and bonds can get

extra income than investor of gold.

The second con of gold as an investment is gold can create a bubble. In turbulent

economies, many people start investing in gold, but when investors start to panic, gold

can become overpriced. This, in turn, means that your investment could lose value once

the price corrects itself.

The third con of gold as an investment is the need of physical storage and

insurance. This is because when the investor invests in gold by purchasing physical gold,

the investor needs to store the gold in bank or storage so that it is not stolen. If the gold is

keep in house instead, there is the probabilities that the gold might be stolen by burglar

that break into the house. Therefore, it is safer and better to keep in bank or storage even

though it is more costly. Besides that, investor also needs to insure the gold as well so

that the investor can claim the insurance when the gold becomes damaged or stolen. Even

though it is more costly but this will reduce the risk for the investors.

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The other cons of gold as an investment is the capital gains tax rates are higher on

most gold investments. This is because gold is considered a collectible in the U.S.

Therefore the gold is charge with tax and the capital gains tax rate for gold investments is

28% which is much higher than the ordinary capital gains rate of 15%. Even though the

mining companies do not invest in gold directly but the mining companies are still taxed

at the ordinary rate.

Lastly, the con of gold as an investment is increasing in gold value coincides with

the local currency devaluation. Many economists argue that gold only increases in value

when the dollar is devalued or inflation is strong. As a result, critics feel that gold doesn’t

offer adequate returns in other markets.

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5.0 Is There an Alternative of Gold?

What is an alternative of gold? An alternative of gold can be in any form as long

as the alternative has the function of store value. An alternative of gold can be other

types of investments that can be made such as the stock market, foreign exchange market

(FOREX), silver, bond and securities. Gold and silver are very related when come to

investment. Therefore, the alternative investment to gold to be look on is silver. Silver

like gold is a type of precious metals that has been regarded as a form of money and store

of value.

In 2013, there is some decreasing in the price of gold that causes some argument

stated that silver might be better investment than gold. There are a lot of reasons used to

explain why silver might be better investment than gold such as wide industrial usage of

silver compared to gold, cheaper price of silver per ounce compared to gold, the historic

silver/gold price ratio was 16:1, the inelastic supply of silver and the inelastic demand of

silver and lastly the large paper future contracts of silver.

The first reason is silver has a wider industrial usage compared to gold. This is

because although both silver and gold are used in jewellery, coins and in electronics but

silver also have other traditional uses like photography, silverware and industrial uses in

batteries, bearings, brazing and catalysts. Besides that, silver also has the new usage in

solar energy, medical applications and water purification. Therefore, silver is very

valuable as an industrial metal because it is the most reflective metal and it is a great

conductor of heat and electricity. Hence, silver has higher industrial demand than gold

which is more on monetary usage. Therefore, there will never come a time in the future

where silver is no longer needed and thus the investment in silver is considered safe.

The second reason is the price of silver per ounce is cheaper than gold. Therefore,

the investment in silver just needs a small amount of capital. Hence, anyone even those

who have a comparatively small amount of capital at their disposal can invest in silver

too if compared to the investment of gold where only those investor who had a lot of

capital or enough capital can invest in gold. Thus those that can afford to invest in gold

will invest in silver instead.

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The third reason is the historic silver/gold price ratio was 16:1. However, in

recent years 2012, silver is relatively cheaper and the ratio is 58:1. This means that silver

is currently undervalued and it is cheaper than historic norms. If the price of silver were

to increase as most of the investor speculate, then the investor that invest in silver will

gain a lot of profit. Therefore, silver might be a better investment than even gold if

investor wants to buy at low prices and sell at high price.

The fourth reason is the exchange-traded funds (ETFs). An exchange-traded fund

is a form of investment in silver which is an investment fund traded on stock exchanges

just like stock. With the advent of ETFs, average investor can attain more precious metals

for inflation hedge while seeking a safe haven without the inconvenience of storing the

physical bar and this can help to save the cost of storage and insurance which is one of

the disadvantage of silver as an investment where the portion of cost of storage and

insurance from profit gained in silver investment is high compared to gold. When ETFs

increase purchase of silver, the demand in silver will also increase. Exchange traded

funds registered another sterling performance in 2010 with global ETF holdings reaching

an impressive 582.6 million ounces representing an increase of 114.9 million ounces over

the total in 2009 which is an increase of 24.6%. As of September 2011, the largest of

these funds holds the equivalent of over one third of the world's total annual silver

production which is about 30% of the silver produced and these silver ETFs are gobbling

up half of all deliverable physical bars. This means that the increasing of silver purchased

by ETFs is increasing the demand in silver and thus this will increase the price of silver.

The fifth reason is the inelastic supply of silver and inelastic demand of silver.

The supply of silver is inelastic because most of the silver which is about 70-80% of the

silver that is brought to market is mined as a by-product of copper mining, gold mining,

zinc mining and lead mining. Therefore, there are very few silver mines in the world

since most of the mines are really lead mines or zinc mines. Hence, mild increases in the

price of silver will not bring substantially more silver out of the ground. On the other

hand, the demand of silver is inelastic because silver has been consumed a lot in

photography by Hollywood and medical photo imaging. There is so little silver used in

each photograph that price increases in silver will probably not reduce the demand of

25

silver. Now, the silver consumption may exceed the silver production because the recent

drop in the price of silver below the cost of production for many silver miners causes

falling mine production of silver and increase the demand of silver for industrial purposes.

Thus, with a relatively inelastic supply and a relatively inelastic demand, it will require a

dramatic explosion in price to bring the supply and demand deficit back into balance.

The last reason is the large paper future contracts of silver. Paper future contract

of silver is also a form of investment in silver which is a standardized contract between

two parties to buy or sell a specified asset of standardized quantity and quality of silver

for a price agreed upon today with delivery and payment occurring at a specified future

date. The contracts are negotiated at a futures exchange which acts as an intermediary

between the two parties. The party that agree to buy the silver in the future or the buyer

of the contract is known as "long" while the party that agree to sell the silver in the future

or the seller of the contract is known as "short". In this contract, the buyer hopes or

expects that the price of silver is going to increase in near future while the seller hopes or

expects that the price of silver will decrease in near future. There has been a large

increase in paper futures contracts in the gold market which are used to suppress the price

but the relative amount of paper contracts in silver is much larger than gold. In other

words, there are more paper shorts that will be caught in an impossible situation when the

price of silver really begins to rise due to the fundamental supply demand gap. They will

be forced to buy silver or go bankrupt. Either action will cause a dramatic rise in the

silver price. If they were to default on the silver contracts, this will signal to the world

that silver is having severe shortage and it also signal a great opportunity to invest.

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6.0 Conclusion

Of all the precious metals, gold is the most popular investment. However, gold

has two significant disadvantages that are lack of uses and lack of productivity. Even

though pure gold has some industrial and decorative utility but the demand for these

purposes is very low and lack of capability of bringing up new production. This means

that majority uses of gold are unproductive which means if you own one ounce of gold

for an eternity, you will still own one ounce at its end.

Besides that, Warren Buffet also stated his opinion on why gold is a bad

investment as the following: “Our country's businesses will continue to efficiently deliver

goods and services wanted by our citizens. Metaphorically, these commercial "cows" will

live for centuries and give ever greater quantities of "milk" to boot. Their value will be

determined not by the medium of exchange but rather by their capacity to deliver milk.

Proceeds from the sale of the milk will compound for the owners of the cows, just as they

did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of

dividends as well). I believe that over any extended period of time this category of

investing will prove to be the runaway winner... More important, it will be by far the

safest.”

In addition, let see another example why gold is not a good investment. Just

compare investment in gold and investment in a company. Percentage of total increase in

gold price is 195% where the price of gold risen from $642.60 to $1895 from 3 January

2007 to 6 September 2011 (5 years).

However, you can earn more than that if you make an investment in Apple

Company. The stock price for Apple Company has risen from $83.80 to $379.74 from 3

January 2007 to 6 September 2011. Percentage of that increment in Apple Company

stock price is 295%. We can clearly see that the returns of Apple Company stock price

are more than the increase in gold price in the 5 years period.

Furthermore, investors earned passive income from investment in stock market.

Companies distribute dividend to investors when they earned revenue. Besides that,

companies produce goods and services to serve the public. Investment in gold doesn’t

27

produce passive income, goods and services to public. Therefore, investment in stock

market is better than investment in gold.

In conclusion, we would like to say that gold is not a good investment in general.

We believe our reliance on secondary data provides us the accurate information. At the

same time, we have assumed that the uses of gold will not be changing in the future.

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30

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