I have mentioned earlier that this article and this article sort of sparked my interest into looking towards gold as an investment. I started reading more about it from a point of view of a potential gold buyer and came across some interesting websites and things that I intend to share with this post (or series of posts). Currently, I intend to run “Gold as Investment” as a series and eventually discuss progressively involved issues like buying options, storing options, and selling options. However, for now, let’s take some baby steps and just stick to the basics as we start with the idea. Basically, in this post, I am describing my personal views (sort of a note to myself) as I embark upon learning more about gold as an investment. The attempt is to write this in such a manner that a rookie like me can understand. 
The following bulleted facts are in the spirit of “know-your-gold-well” type of understanding. If you are getting ready to put some money into buying gold, you better understand what “gold” means. The first step is to understand the measure of gold purity because this thing (and the terms involved) will keep coming up for ever and ever into any gold buying decisions/comparisons you make.
- Pure gold is a very soft metal (in sense you can scratch it with a needle or easily hammer it into different shapes). If you handle pure gold often, it will invariably gather some dings and scratches. At times, these external defects will reduce some of it’s value, especially in the case of gold coins.
- Therefore, to improve it’s handling quality, people add some alloys (a mixture of other metals) to make it harder (more resistant to scratching and deforming).As alloys are added, the purity falls down and there is a need to quantify the drop in this purity. This is done by using the the unit of “karat” of purity-scale.
- The numbers on the karat scale have a linear relation to purity of gold by weight. The highest number being 24 karat (written as 24k) and denotes the gold of highest purity (100% pure gold by weight; scientifically, 100% pure is only a theoretical purity. In reality, gold is considered 24k when it is more than 99.95% pure). Since the scale is linear, 12k gold will contain 50% gold and 50% alloy (by weight). For example, if you have 1 pound of 12k gold specimen, it means that there is half pound of pure gold and half pound of alloy in that specimen. Similarly, a 6k gold specimen will have 25% gold and 75% alloy by weight. You may get a better feel of the “karat” scale from the graph shown below.
The popular purity numbers and the percentage of gold corresponding to them are summarized below-
- 24k gold contains 99.95 % (or more) gold by weight
- 22k gold contains 91.67% gold by weight
- 18k gold contains 75.00% gold by weight
- 14k gold contains 58.33% gold by weight (in US, commonly advertised jewelry is usually 14k, as far as I have observed)
- 10k gold contains 41.67% gold by weight
- The prices that are published on a lot of websites are for one ounce of 24k gold. For example, today’s price for gold at market close was $649.90; which means that one ounce of 24k gold can be bought at $649.90 (of course, there are markups usually to cover minting, handling, and distribution which increase the cost by the time it comes to the market, but for now we will assume it’s just $649.90). It’s important you understand this. If someone tries to sell you an ounce of 6k gold for $649.90….you need to recognize that it’s not a good deal. On a linear scale the price of one ounce of 6k gold should be roughly 1/4th the price of 24k gold because an ounce of 6k gold contains only 25% of gold by weight. In this example, an ounce of 6k gold should be roughly around $162 (perhaps slightly more).
- Edited and corrected (March 9th): Thanks to Jay’s comment below, there is another important piece of information that fits in here. Usually gold bullion weight is mentioned in terms of amount of pure gold itself. Not the total weight of the sample. For example, consider a form of gold bullion from the US mint: American Eagle One Ounce Gold Reserve coins which are always listed as a “1 ounce”. Earlier, I thought (I did mention I am a rookie in this right) that the weight of the coins is just 1 ounce and hence the weight of pure gold in the coins must be about 0.9167 ounces. Apparently, that is not true. In the US Mint brochure, the weight of the coin is listed as 1.0909 ounces of which 1 ounce is pure gold and rest is taken up by the alloying material.
In the next article in this series, we will discuss some investment issues about gold. Till then, you can read and gather some more knowledge and start falling in love with the yellow metal. Here are some resources for you (also the sources of information for this post):
Gold image source: www.certifiedgoldexchange.com
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Thanks for the information. I will be interested in what your thoughts are regarding this as being a good investment long term.
Is there such a thing as an investment-grade gold product that is not 100% gold? Obviously jewelry (and in general, “useful” gold such as you might find in small decorative items) would never be 24k because it would fall apart so easily. I’ve got a 14k class ring and a 14k gold chain. I never wear the ring, but I think it’s worth about $300 more now than when I bought it in high school.
But if you go to a gold shop and ask to buy an ounce of gold, would they really sell you an ounce of 14k or 10k gold? I really doubt it, although I’ve never tried it. Everything that I’ve read about an “ounce of gold” for investment purposes refers to 1oz of pure gold (well, as pure as it can get, as you explained).
I am interested but not fanatical about gold as an investment. Mostly I consider it a hedge against inflation and general economic and social turmoil. If we revert to a state of anarchy (the chance of which is small, but greater than 0… big enough that it pops up in the back of my mind every once in a while) then gold will be one of the only stores of wealth. But in normal times, gold just doesn’t do that well as an investment. In general, it keeps up with inflation. Sometimes there are market forces that drive it up or down quickly, but these are usually short-term. Day-to-day it can be very volatile. I will only start seriously looking at gold for investment purposes when I have about $50k in other investments (real estate and stocks). At that point I will buy a few ounces and sock it away somewhere.
GCS: The US mint never made pure gold coins till 2006 :). The American Buffalo is the first 24k gold coin they minted. So all these years people who were buying the popular American Eagles were getting 22k gold. And people did use them as an “ounce of gold” for investment.
I will write something about gold investment in the coming posts (some of which will be reflecting the thoughts in your comment). This one was just a warm up post.
Interesting. I guess I had only ever noticed the Silver Eagles (which, like almost every silver coin I’ve seen, is 99.99% Ag). Never knew that the American Eagles were 22k. Were they priced at 24k prices?
Pricing is a bit tricky when it comes to coins. You can claim that the minting is expensive, the coins are rare, or something like that and charge a *premium* on the coins. At present the 2007 22k American Eagle is more expensive than the 2007 24k American Buffalo.
However, I was misled about the weight of the bullion, read Jay’s comment below.
Ok, this article is just wrong.
Yes, Karet measures the purity of gold in a piece of jewelry or bullion.
However, when you buy a “one ounce” bullion piece you are actually getting one ounce of gold. The Gold Eagle is one ounce of gold. It actually weighs more than one ounce because the alloy metals have weight too.
The only exception to this is the british soverign which has a bit less than a quarter ounce, and was minted quite awhile ago as a currency, rather than an investment instrument. But all reputable dealers price it based on its actual gold content (not much numismatic value to them) rather than its total weight.
Also, remember the “gold price” is not the price you see quoted. The commodity gold price, or spot price, is the current market price for 100+ ounce bars of gold. The cost of manufacturing and distributing bullion coins and jewelry mean that you will pay more than this price.
The krugerrand has usually the lowest markup because its not as popular in america (though it is probably the most popular in the world.)
The way to think about gold as an investment is to think of it as a foriegn currency. You buy gold not because gold itself gets more valuable… but because the alternative (holding your current currency, EG US Dollars) is getting less valuable. The gold price has not been rising– the dollar has been declining.
Gold is actually a much better (and harder to game) measure of the devaluation of the dollar due to inflation than the CPI numbers the government puts out.
So, if you want wealth to grow, you should put it into a growing enterprise. But if you want to protect it from inflation, gold is a good choice. Certainly most people keep a lot of money savings accounts– and these accounts return interest far less than the %7-%13 the funds in them are losing due to inflation.
Jay: Thanks for pointing that out. I checked it with US mint specifications, and you are right. The one ounce American Eagle does weight more than one ounce. I will make the necessary changes in the article.
Learning moment for me.
Interesting! Triggered by some of the monex ads on TV, I looked up a little bit of info online, but never really thought of gold as a serious investment option. I will watch out for the followup articles.
Finally somebody (that authors a PF blog) writes about gold as an investment. This has been something I have wanted to know more about for a while. I caught the “gold bug” when I read the auto biograpy of Bruce McNall (who was heavily involved in investing in gold before he got thrown in the slammer). I just haven’t had time to research it myself. Keep the posts coming.
Jon
[...] Golbguru from Money, Matter, and More Musings has a new series Gold as an Investment. He has already got some great comments on his basic introductory article and it looks like this is going to be a fiery set of posts! I personally never thought of gold as a serious investment vehicle, so I sure will watch out for this series for the nuggets of information (pun intended) in it, both in the main article and in the comments. [...]
I have a friend who can get me 24K gold cheap, he is geniune, i have known him for a long time and its not possible that he will cheat me in any way. The price at which he’s wanting to sell me the Gold as at hand with him is cheaper than the the price at which it is sold on the market. All i want to know is that how can i check if the gold he wants to sell to me 24k pure,if i should get the Gold is it possible to sell it out to intrested individual buyers. I am buying 5 pounds from him, is it possible to sell some of the Gold he is sending to me and where.
martin
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