Investment strategies

Fundamental analysis

Investors may base their investment decisions on fundamental analysis. These investors analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity, and energy prices. They would also analyze the total global gold supply versus demand. Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.

Technical analysis

Investors may base their investment decisions solely on, or partly on, technical analysis. Typically this involves analyzing past price patterns and market trends, in order to speculate on the future price. Some investors try to predict the future gold price by tracking the ratio between the Dow Jones 30 and the gold price. The Dow/gold ratio has fluctuated from a low of 1.0 in 1980 (i.e. the Dow and gold price were the same) to a high of 43.7 in 1999 (i.e. the Dow was 43.7 times the gold price).

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing gold assets and then purchasing more gold on account with the loaned funds. In order to keep the cost of debt to a minimum, these individuals would normally seek a loan in the currency with the lowest LIBOR, which as of April 2006 was the Japanese yen. This technique is referred to as a "yen-gold carry trade". Leverage is also an integral part of buying gold derivatives. Leverage may increase investment gains but also increases risk, as if the gold price decreases the investor may be subject to a margin call.

Gold's value versus money supply

Historically increases in the supply of paper money or fiat currency through increased money supply would cause the demand for gold to increase. There was a time when gold was money and vice versa. If citizens felt that there may be insufficient gold to cover the paper money in circulation, they would queue up at the bank to change their paper currency back into gold.

However, since the gold standard was ended on August 15, 1971, governments have been free to print as much money as they choose, without fear that their populations will come knocking on the central bank's door demanding to change their paper money back into gold.

In January 1959 US M3 money supply was $288.8 billion, and the official gold reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces (there are 32,150.7 troy ounces in a tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the theoretical price should then have been $518 per ounce, the actual price, as fixed under the gold standard was only $35 an ounce.

By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces. This means that today, in 2005, there are $37,831 in circulation for every troy ounce of gold held by the United States.

However, this increase of 75 times in the ratio of central bank gold holdings to debt does not allow for the fact that the gold standard was abandoned in 1971 and gold holdings have been deliberately and considerably reduced. Another far less dramatic way of looking at the same figures is this: In 1959 US government debt valued in gold was 8 billion Troy ounces, in 2005 US government debt was 20 billion oz gold - an increase of only 2.5 times.

The above numbers show the falling influence of gold in the monetary system of the world today. Gold bugs believe, or even hope, that one day gold's importance will return as the printing of paper money gets out of control and we end in a hyper-inflationary fiat money collapse.

They sometimes cite the huge United States public debt, budget deficit and trade deficits as additional evidence that things are getting out of control. For example, in 1959 US public debt was $290,797,771,717 ($290 billion), whereas by February 2006 it had reached $8,205,376,724,587 ($8.2 trillion). The U.S. budget deficits are the largest in history and according to the U.S. Government's own published plans, the budget will not be balanced in the foreseeable future.

The United States Federal Reserve ceased publishing M3 data on 23 March 2006, with the last published data indicating a year-on-year growth rate of 8.23%.

Central banks may see this as a reason to limit further increases in their reserves of dollars, and thus alternatives such as gold or the euro might be considered.

Supply

In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes, which would form a sphere slightly less than 25 meters in diameter. Global gold production is between 2,500 to 3,000 tonnes per year, which would mean that about 155,000 tonnes of gold would have been mined as of 2006, with a total value of $3.2 trillion at June 2006 prices.

Bulls versus bears

Many argue that gold's role in the world's monetary system has ended, and that it will never again represent the store of value that it once was. John Maynard Keynes, the influential economist, as early as 1924, described the gold standard as a "barbarous relic". Many central banks, especially in Europe, seem to agree, and have been selling off their gold reserves at the rate of around 500 tonnes a year. The gold price peaked at around $850/oz t ($27,300,000 per tonne) in 1980, and in real terms is still well below that. However, since April 2001 the gold price has more than doubled in value against the US dollar (as seen here), prompting speculation that this long secular bear market (or the Great Commodities Depression) has ended and a bull market has returned.

Taxation

Gold maintains a special position in the market with many tax regimes. For example, in the European Union the trading of recognized gold coins and bullion products is free of VAT. Silver, and other precious metals or commodities, do not have the same allowance. Other taxes such as capital gains tax may still apply for individuals, according to their jurisdiction. There is no capital gains tax in Switzerland.