Are all gold equal?

Introduction

Image1: Gold in element table

Gold is an inert metal that is soft and malleable. It is also a fair conductor of heat and electricity. Added to the fact that it is relatively scarce in compare to other metal such as copper and silver, there is a continous demand for gold as an ornamental, jewellery or for use as electronic parts.

A growing number of people are hoarding gold as a form of investment as they expect that the value will eventually goes up on a long term basis. Historically, gold also has been used as a medium of exchange by different nations and empire. The question is, which gold is the right one for investment?

Physical gold vs Paper gold

Image2: Gold bar by KABGold

Physical gold refers to any form of gold held physically by a person or entity. Holding physical gold is the purest form of gold investment or hoarding but it comes with several hurdle. Gold minting involves tremendous number of overheads such as mining cost, casting cost, packaging, delivery fees and taxes. Such cost could reduce the physical gold after sale value, especially if the physical gold is quite small in size.

Image3: Uncang Emas is a custodian gold example

Paper gold on the other hand refers to any form of custodian gold held by either banks, firms or private companies on behalf of a customer. One of the benefit of paper gold is refractory purchase; the custodian entity buys a large-sized gold bar with minimal overheads and clients own a fractional rights over the gold bar. An example of such custodian gold in Malaysia is KABGold.

However, such scheme is not without risks and other costs. The custodian entity may or may not charge a safekeeping fee or swap fee if the client opt to swap their rights for a physical piece. Custodian entities also may reserve the rights to determine on a buyback purchase, often at the disadvantage of the clients. In addition, a custodian may run a way with clients fund or ended up in bankruptcy, putting clients gold as hostage. As custodian gold generally does not fall under the formal purview of a bank, and thus is not protected by depository protection in any country.

Paper gold may also refers to price tag trading items such as gold shares in the form of leverage or ETFs. Such form of gold investments are at a higher risk even as no physical gold is ever held by the trading entities.

Forms of physical gold

Supposed you are interested in purchasing your first investment gold. There are few consideration that you should look into such as:

• gold purity
• gold form
• manufacturers' reputation
• bullion status

Gold's purity

Image4: Gold purity are usually shown on the gold certificate

Gold purity are usually measured as parts per thousandth. A gold with a purity tag of 999 means 99.9% of the gold item is made of pure gold while 0.01% are impurities. A gold with a purity tag of 916 means 91.6% of the gold item is made of pure gold while 8.4% are impurities. In other words, a higher the purity tag is better.

I personally discouraged anyone from investing in any gold with purity tag below 916. This is because, at this level, the cost of extracting the pure gold metal from the item increases, thus reducing the gold value altogether. Why do minters make gold with impurities? The primary reason is because, pure gold is soft, and thus it may not be suitable to be used to make heavy jewelleries. Simply said, the impurities will make the gold harder.

Gold form

Image5: Dinar is an example of a gold coin

Generally, investment gold are in form of bars. Some are also present in the form of coins, but they usually have higher minting costs. Jewelleries such as rings or necklase usually incur very high minting cost and are not suitable to be used as investment. HOWEVER, buying pure gold from the after market, even if it is the form of jewellery might be profiting as the minting fee would probably have been deducted.

Manufacturers' reputation

Image6: an example of a gold bar with a LBMA logo

With increasing number of fake gold in the market, people tend to trust gold item made by reputable manufacturers. Reputation status differs between countries, but generally, gold item made by companies with the London Bullion Market Association (LBMA) logo tend to have the highest demand. That is not to say that there are no counterfeit LBMA bars in the market either. At the end of the day, physical testing of a gold item either using a spectrometer, acid test or fire test is the only definite way to confirm that an item truly contain gold or not.

Bullion status

Image7: Kijang Emas is a bullion by Bank Negara Malaysia

Bullion refer to a gold item which is produced officially by a nations' central banks. An example of a gold bullion is the Kijang Emas by Bank Negara Malaysia. A bullion has an additional value as a currency, although the face value will tremendeously below the actual metal value. A bullion usually is highly regarded and in many countries, bullion may be imported tax-free.

Rounds and replica are not to be confused with a bullion. Although they contain pure gold, they are not a credentialed bullion. They are imitates of any popular bullion and are commonly made by private entities.

Gold value

There are generally three type of gold value.

Image8: Spot gold price shown on Kitco website

Spot value refers to the actual metal value of a traded gold. A common site used to refer to spot price is Kitco. Price are displayed with substantial spread between the buy price and sell price. The price shown here refers to gold with a 999 purity. A gold of other purity are priced at a relative value to that. for example, a spot value of a 916 gold item is 91.6% to the spot price shown at Kitco.

Retail value refers to the final price of a physical gold item sold to end user. the price are substantially higher than a spot price and tend to be fixed by a certain associations. In Malaysia, retail price is influenced by the FGJAM association.

A buy back value refers to the gold price accepted by pawn shops and gold shops. Depending on geographical region, the price may be even lower than the spot price. If a gold item has additional impurities such as silver lining or diamond, the price may be dropped further.