When Napoleon escaped from Elba in 1815 and managed to get straight back in to France he started to go about raising an army. The price of gold was then the equivalent of £4.32p an ounce, however, overnight it leapt to £5.35p on the back of extraordinary demand.
The London bullion house Mocatta & Goldsmid declared that the big buyer was Nathan Mayer Rothschild, acting on behalf of the British Treasury. His orders were to dispatch the gold quickly to the Duke of Wellington. Not until Napoleon was defeated, at the Battle of Waterloo, did the gold price simmer down.
Iran's frozen assets
In November 1979 the US froze Iran’s assets, that was just a few weeks before the Soviet Union invaded Afghanistan. In the two months to late January 1980 the price of gold shot up from $400 an ounce to $850.
After Iran’s assets were unfrozen, and it became evident that the Soviet Union was hopelessly tied up with Afghanistan, the price fell back to the $400 level.
Hedge in times of War
In times of war, economic uncertainty and geopolitical instability, buying gold makes more sense than anything else. Gold has proved itself as the enduring talisman for troubled times.
As Disraeli said “more men have been knocked off balance by gold than by love”.
For well over 6,000 years men and women have fought for it, died for it, cheated for it and slaved for it.
The first gold rush of 1697 brought gold from Brazil into London, partly transported by Moses Mocatta on ships owned by the East India Company, which had a Royal Charter from Queen Elizabeth I.
This inflow of gold led to demand for a purpose-built London vault, which the Bank of England duly set up. Their 'bullion warehouse' served the whole of the European market, as it does now, and was further stocked by the influx to London from the subsequent gold rushes in California, Australia and South Africa.
The refineries that were set up to process this gold were located close to the Bank of England which played a key role in being a custodian, regulator and facilitator of lending and selling of gold by other banks.
In 1750 the Bank set up the London Good Delivery List, which formally recognised those refineries who produced gold bars of a certain standard and could therefore be allowed to enter the London market.
Today this list is regarded as the only globally accepted accreditation for the bullion market, ensuring that the wholesale bullion bars traded in the market meet standards and quality required by Good Delivery.
The Golden Ring
By 1850, the five companies - N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins - that 150 years later would form the London Gold Market Fixing Company, were already established and flourishing.
The term London Gold Market refers to these five companies who formed to oversee the operation of the gold market in London. In 1919, it set up the first Gold Price fix at Rothschild's offices. The fact that London was at the centre of international time zones has always facilitated it being the perfect place from which to operate the market.
Among the largest gold vaults
The world’s trade in bullion is London-based with a global reach of activity and participants. Today the Bank of England has one of the world’s largest gold vaults and is the second-largest custodian of gold in the world, after the New York Federal Reserve.
The Old Lady’s vaults hold over 400,000 bars of gold. It also provides safe custody for the United Kingdom’s gold reserves, and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market, which is the global centre for gold trading.
What is gold mining?
Gold mining is the extracting of ore - metal rich rock - from the earth’s crust. Some 65% of the world’s gold production comes from surface mines, with the balance from underground gold mines Mine production accounts for the largest part of gold supply – typically some 75% each year.
Demand higher than supply
But the annual demand is higher than the supply and the shortfall is made up by recycling. The majority of recycled gold, some 90%, comes from jewellery, with gold extracted from technology providing the remaining 10%.
The Top Ten largest producers of gold are (in approximate tonnage): China - 429; Australia – 289; Russia – 272; United States – 244; Canada – 171; Peru – 167; South Africa – 157; Finland – 130; Mexico – 122; Guyana – 114; and Brazil 92.
Largest holders of gold reserves are: the United States - 8,133 metric tons; Germany – 3,370; the IMF – 2,814; Italy – 2,452; France – 2,436; Russia – 2,066; China – 1,843; Switzerland – 1,040; Japan – 765; Netherlands – 612; and India – 592. The UK holds 310 metric tons, which is a mere 7.3% of our foreign exchange reserves, the US is 74%, Germany 69%, Italy 65% and France 59%.
Carats for purity
The purity of gold is measured by its fineness (parts per 1,000) or by the carat scale. Pure gold (1,000) is 24 carat; London Good Delivery is 995.
Most coin is 916 or 22 carat, whilst high quality jewellery is 750 or 18 carat.
In the UK 9 carat (375) is the minimum accepted for the metal to be legally classed as gold.
By the way the term carat derives from Greek and Arabic words meaning ‘the fruit of the carob tree’, the seeds of which were known for their consistency and used to balance the scales used by merchants at ancient bazaars.
The weight of gold is customarily measured in try ounces, which is the equivalent of 31.10 grams. A kilo bar is 32.15 oz. troy, and 1 metric ton is 32,150 oz. troy.
When buying bullion coins or collectable coins ask for the ‘melt value’ – the basic intrinsic bullion value of a coin if it was melted and sold. Always get an independent appraisal of the specific gold product that you are considering.
Consider additional costs such as insurance and safe deposit boxes which will cut into the investment potential. When buying gold that is stored in a third-party security facility, take extra precautions to ensure that the metal exists, is of the quality described, and is properly insured.
A wise investment
Gold bullion is the ultimate insurance and, given its ability to maintain a high value, should be viewed as an essential part of everybody’s investment portfolio. Here are some of the many reasons why buying gold is a wise investment.
Gold offers about as much certainty as you can get and bullion, unlike other investments, will always hold a value. Gold bullion is an effective way of hedging against other investments as its value tends to be particularly buoyant when other investments such as stocks and property are under-performing.
Gold can also be used effectively to insure you against other economic factors such as inflation and deflation, interest rates, stock market jitters and currency problems. Importantly, as a highly precious metal, gold's worth is recognised internationally, and is considered highly valuable no matter where you are in the world.
An additional convenient, positive aspect is that gold bars and gold coins can be taken with you easily, wherever you go.
Unpredicatability drives demand
The unpredictable nature of the UK economy and the Eurozone, especially since Brexit began, suggests further long-term strength and likely rises in the global gold price, but these potential profits should not be the main reason for investing in gold.
Bullion should be viewed as a non-speculative, safe, long-term method of safeguarding your wealth.
Gold portfolio investing
Owning gold offers a unique and interesting element to your portfolio, offering an opportunity to spread the risk from the uncertainty of other investments such as stocks and shares, property, and currencies, which may be under-performing.
Gold's bear market hit the bottom at the end of 2015, and the gold price soared in 2016 spurred on by economic and political uncertainty caused by events such as the Brexit referendum result and Donald Trump's election.
The price continued to rise into 2017 with tensions between the USA and North Korea over nuclear missile testing, but by the end of the year the Cryptocurrency bubble was stealing the limelight from gold, shortly followed by a stock market boom to welcome in 2018.
This bubble continued until March but now, at the start of June 2018, we see stock markets stalling, currencies growing more and more volatile, and gold prices climbing up once more, proving that you can't stay away from gold for too long.
The gold price tends to rise as investors in other markets get the jitters, but the big question is what happens next? For those of us in the UK the big concern is Brexit. Will we, won't we, how hard an exit will it be, will it trigger another General Election... there are so many factors to consider and this is causing investors to be cautious.
The problem is that the UK is not the only country going down the road of leaving the UK. Italy's political upheaval could see them follow us, and losing two major nations would be a huge blow to the Eurozone economy and the stability of financial institutions within it.
As with all investments, there are no guarantees trends will continue. Gold going up doesn't mean it will keep going up for months to come.
By conducting your own research and keeping an eye on the news and current affairs you can learn about what triggers a rise or fall in the gold price and act accordingly with these developments.
Buy gold primarily as a safeguard for the future, and secondly as a profitable investment. If you are of the belief the current economic difficulties will continue down the same road for some time to come, then the gold price is likely to remain high and continue to rise.
Whether you’re new to bullion investment or not, deciding whether to invest in bullion bars or bullion coins should take some consideration. Before making this decision, it would be advisable that you conduct your research as there is no definitive right or wrong answer, it will vary depending on the needs and circumstances of the individual investor.
However, as when making any other investment there are a several factors to consider including the value of your investment and the product premiums, how long you plan on keeping it, where to store it, capital gains tax (CGT) and how you plan on realising the value of your investment.
Gold coins are available in a variety of sizes such as 1oz, 1/2oz, 1/4oz and 1/10oz making them highly versatile, easy to store and ideal for trading if the banking system did ever collapse.
Popular gold coins include the famous South African Krugerrand coins which tend to attract the lowest premiums making them perfect for smaller and first time investors. Alternatively, British bullion coins like the gold sovereign, half sovereign and gold Britannia are perfect for coin investors who hold a large amount of money in gold bullion due to their CGT free status.
It is advised that small and first time investors look into both coins and bars, despite coins being the obvious choice for lower value investments.
A 100g gold bar costing around £2,600 or a 1 ounce gold bar costing around £800 are popular starting points for some investors.
Popular gold coins include the famous South African Krugerrand coins costing around £800, which tend to attract the very lowest premiums making them perfect for smaller and first time investors. Gold British coins, in particular gold sovereigns and half sovereigns, offer a much cheaper way to buy gold in smaller units costing around £200 and £100 respectively.
Storing Bullion Bars and Coins
Whether you are investing in one 1 kilo gold bar or approximately thirty 1oz gold coins, the gold size and mass would be near identical, however one would be easier and more convenient to store than the other.
The 1 kilo gold bar is a single unit therefore you would be confined to storing it in a single location or deposit box or part of your home.
However, with the thirty 1oz coins you have the ability to split your investment, for example ten in a deposit box within your bank, ten in a family members safe and ten hidden around your home, therefore physically having them to hand.
If you have a small investment, then you may not have access to a deposit box, therefore simply storing your bullion creatively within your home may be the best option.
However, it is worth noting silver bullion, due to its value being substantially lower than that of gold, is much more difficult to store than gold.
Gold has been used as a form of currency since 643 BC. That gives people an emotional feeling that it will hold it's value better than paper currency. But gold hasn't been used as money since President Nixon took the world off the gold standard in 1973.
Second, the physical supply of gold is relatively inelastic in the short term with regard to price. It means the supply will not increase even if the price does. That's because gold must be mined, and it takes a long time to find new mines and get the gold out of the ground.
Limited supply makes the gold market both thin and volatile when demand grows sharply. That means there are few traders, and they have a lot of influence in the market. They have the ability to drive prices up quickly once it looks like there is an upward trend. At a certain point, gold can quickly become a bubble. When the bubble bursts, you can lose a bundle.
Gold, more than any other investment, has the traits to become an asset bubble. Why?
According to commodities guru George Soros, it's very difficult to determine its real intrinsic value. Stocks have underlying earnings, and real estate has rental equivalents.
The only underlying value of gold is its cost to mine. Even that is difficult to determine since miners say it's anywhere between $500 to $800 an ounce.
Before gold was used as coinage, its value was recognised. Gold jewellery is buried in the Tomb of Djer, king of the First Egyptian Dynasty. Gold's beauty, lustre, and malleability made it perfect for many uses. In fact, the Egyptians became masters in the art of beating gold into leaf.
Gold was first used as a standard in 643 BC when the precious metal was used for coinage. In 30 BC, the Roman Emperor Augustus set the price of gold at 45 coins to the pound.
Its value steadily increased since then, reaching a peak of $1,823 an ounce in 2011.
(Sources of information and comment that should be credited include: the Bank of England; the World Gold Council; Gold.co.uk; Bullion By Post; Forbes; Gold Price; Quartz; OANDA; Timothy Green; and the US Federal Trade Commission).