Diamond Investments

Historically,
the wholesale diamond price has been controlled by De Beers Group, which has an estimated 40% to 50%[1] of the market. Botswana is currently the largest producer of diamonds with mines operated by Debswana, a joint venture between De Beers and the Botswana government. However, since the 1980s, other producers have developed new mines in Russia, Canada and Australia for example, challenging De Beers' dominance (historically De Beers market share was considerably higher, e.g. 80%[citation needed]). De Beers through its trading company known as the DTC raised wholesale diamond prices three times in 2004 by a total of 14%.[citation needed]

The United States is the biggest consumer of diamonds in the world. The U.S. accounts for 35% of diamond sales, Hong Kong 26%, Belgium 15% (Antwerp is the world's diamond-trading centre), Japan 6%, and Israel 4% [2]. Israel and Belgium are important Hubs for trading diamonds thus consumption numbers are a bit misleading. The price of diamonds fluctuates with global demand and the world economy.

Diamond prices vary widely depending on a diamond's carat, color, clarity and cut (The 4 C's). In contrast to precious metals, there is no universal world price per gram for diamonds. However the industry does use tools such as the Rapaport Diamond Report and The Gem Guide which are published weekly or quarterly, as a price references.

In addition to print and online references, numerous institutions have varying standards which can be used to aid in diamond identification and pricing. Gemological Institute of America, American Gemological Society and International Gemological Institute are three such institutions. Often these organizations focus on new research and education which they pass on to their members and the public.

Methods of investing in diamonds


Polished and rough diamonds lack some of the desirable attributes of investment vehicles, including liquidity, homogeneity and fungibility. Grading and certification by recognised laboratories goes some way to redressing this. Weight and cutting proportions are parameters which can be precisely measured. Colour and clarity grades are parameters which need to be determined by gemologists.

The increasing quality and size, and decreasing price, of synthetic diamonds also presents a threat to the value of polished diamonds as a long-term investment.[citation needed] The possibility of low-cost ultra-high-quality diamonds becoming available in industrial quantities at some time in the future is not an encouraging prospect for long-term investors in diamonds.[citation needed] However, synthetic diamonds have been manufactured since the 1950s[3] and have yet to make a major impact on the market.

A cautionary example of such a price fall caused by introduction of a new simulant strongly undermining the prices of a natural gem was the permanent fall in natural pearl prices with the introduction of cultured pearls. The mechanism by which prices were affected is complex. In part because of the social acceptability of wearing cultured pearls to much of the market, customers migrated from the natural to the lower priced cultured product. This altered the supply and demand situation for natural pearls and perhaps the overall prestige of pearls in general was lowered. Where synthetic stones are less socially acceptable to the market for the natural version, arguably as with synthetic corundums where the two markets, natural and synthetic, are mostly separate, the prestige of the natural stones has been, with effort, retained. Thus increased availability and lowered prices of synthetics may or may not have major implications for the future price of natural diamonds. The fall in natural pearl prices was also affected by the onset of the Great Depression and the development of the oil industry in the Persian Gulf (which not only provided pearl divers with better-paid, safer jobs, thereby increasing production costs and lowering production capacity, but also increased pollution in the gulf, thereby reducing supply) - neither of these factors apply to diamonds. In addition, the introduction of synthetic rubies in the late 19th Century did not appear to have a permanent effect on the price of natural rubies.

There are several factors contributing to low liquidity of diamonds. One of the main is the lack of terminal market. Most commodities have terminal markets, and some form of commodities exchange, clearing house, and central storage facilities. Until recently this did not exist for diamonds. Diamonds are also subject to value added tax in the UK, EU, and sales tax in most developed countries, therefore reducing their effectiveness as an investment medium. Most diamonds are sold through retail stores at very high profit margins.

As diamonds in larger sizes become increasingly rare and valuable, any easily visible and readily understood pricing system has been difficult to establish. Martin Rapaport produces the Rapaport Diamond Report, which lists prices for polished diamonds. The Rapaport Diamond Report is relatively expensive to subscribe to, and as such is not readily available to consumers and investors. Each week, there are matrices of diamond prices for round brilliant cut diamonds, by colour and clarity within size bands, and also other shapes. The price matrix for brilliant cuts alone exceed 1,400 entries, and even this is achieved only by grouping some grades together. There are considerable price shifts near the edges of the size bands, so a 0.49 carats (98 mg) stone may list at $5,500 per carat = $2,695, while a 0.50 carats (100 mg) stone of similar quality lists at $7,500 per carat = $3,750. This may appear such a large difference as to defy logic, but in reality stones near the top of a size band tend to be uprated slightly. Some of the price jumps are related to marketing and consumer expectations. A buyer expecting a 1 carat (200 mg) diamond solitaire engagement ring may be unprepared to accept a 0.99 carats (200 mg) diamond.[citation needed]

There are numerous diamond grading laboratories, and there is no easy way for investors, consumers, or even dealers to know the relative competence and integrity of each. Even the market-leading Gemological Institute of America (GIA) suffered embarrassment recently when a small number of large, important and valuable diamonds were overgraded, resulting in legal action by one dealer against the dealer who had submitted them to the GIA for grading. A number of GIA employees left after the scandal emerged, and the GIA has changed a number of its procedures. There are also a number of laboratories affiliated to CIBJO (Confédération Internationale de la Bijouterie, Joaillerie et Orfèvrerie, also known as the World Jewellery Confederation). There must be commercial pressure on all labs to upgrade marginal stones or lose business to other labs who are prepared to reduce standards.

Leaving the concept of fungibility to those expert economists who understand it, the non-linear pricing of different sizes (weights), means that it is not realistic to exchange, for example, 2 quarter carats (50 mg) for 1 half carat (100 mg), even if their relative values can be calculated. With commodities such as gold, it is clear that 1 twenty gram bar is worth the same as 2 ten gram bars, assuming the same quality. In most terminal markets, there needs to be a readily available standard quality, or limited number of qualities, available in sufficient quantity to be tradable. It is this factor which affect liquidity. There are far too many variables in diamond quality, and an almost infinite graduation of each quality parameter.

There are fashion and marketing elements to take into consideration. De Beers expends marketing efforts to encourage sales of diamond sizes and qualities which are being produced in relatively large quantities. They have also been known to take steps to discourage investment, primarily because they perceive, probably correctly, that bubble prices which are followed by sharp falls are bad for long term consumer confidence in diamonds as a long-term store of value. Diamonds are primarily a consumer item.

The main positive investment parameter of diamonds is their high value per unit weight, which makes them easy to store and transport. A high quality diamond weighing as little as 2 or 3 grams could be worth as much as 100 kilos of gold. This extremely condensed value and portability does bestow diamonds as a form of emergency disaster fund. People and populations displaced by war or extreme upheaval have utilised this property successfully, and presumably will do so again in the future.

The arguments given mean that it is almost certain that diamonds can never be commoditized sufficiently to allow efficient and sufficiently liquid markets. This does not mean, however, that diamonds can never be used or considered as investments. The very lack of liquidity itself could be used by a speculator who was prepared to make a market in diamonds. Any such investor would need to ensure that he maintained sufficient personal liquidity to avoid distress selling, except by others. Such an investor would need to expend effort to market his stock, and to advertise his readiness to buy and would effectively become a trader rather than investor.

In 2009 an exchange was launched by DODAQ to trade categories of polished diamonds. The DODAQ exchange is effectively a terminal market for round polished certified diamonds (which is the most liquid part of the market) and hosts it’s centralised storage facility in a Freezone, thus overcoming the traditional barriers to entry for investors of sales tax and low liquidity / resale market.

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how to invesment in gold 2

Bars
The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Austria, Liechtenstein and Switzerland, these can easily be bought or sold "over the counter" of the major banks. Alternatively, there are bullion dealers which provide the same service. Bars are available in various sizes, for example in Europe these would typically be in 12.5kg or 1kg bars (1kg = 32.15072 Troy ounces), although many other weights exist, such as the Tael, the 10oz or 1oz bar.

Buying gold coins is a popular way of holding gold. Typically bullion coins are priced according to their weight, with little or no premium above the gold price. Amongst the most popular bullion gold coins are the South African Krugerrand, the Canadian Gold Maple Leaf, the American Gold Eagle, the American Gold Buffalo, and the Australian Gold Nugget, all of which contain exactly one troy ounce of gold each. Other popular one ounce bullion coins include the Chinese Panda, and the Austrian Philharmonic. Gold coins which are used as bullion coins include the British gold sovereign and the Swiss Vreneli, but these are much lighter than one ounce. Again the large Swiss and Liechtenstein banks will buy and sell these coins over the counter. Also available is the gold dinar which has Islamic significance.

Certificates
A certificate of ownership can be held by gold investors, instead of storing the actual gold bullion. Gold certificates allow investors to buy and sell the security without the hassles associated with the transfer of actual physical gold. The Perth Mint Certificate Program (PMCP) is the only government guaranteed gold certificate program in the world. Some argue that it is not the same as owning the real thing, as a certificate is just a piece of paper, especially in a war, crisis, or credit collapse.

Accounts
Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Digital gold currency accounts and the BullionVault gold exchange work on a similar principle. Gold accounts are typically backed through unallocated or allocated gold storage. Different accounts impose varying levels of intermediation between the client and their gold, for example through bailment or within a trust. Bailment is the legal action of a client entrusting their physical property to another party for safekeeping, and paying for the service.

Exchange-traded funds
Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London, New York and Sydney. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold. Due to costs, the amount of gold in each certificate is now slightly less. They are fully backed by gold which is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market [6].

Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars. Economies of scale, liquidity, and ease of purchase and sale make ETFs an increasingly popular method of investing in gold.

Spread betting
Firms such as Cantor Index and IG Index, both from the UK, offer the ability to take a bet on the price of gold through what is known as a spread bet. Say the price of December gold was quoted at $475.10 to $476.10 per troy ounce. An investor who thought the price would go down would "sell" at $475.10. The minimum bet is $2 per point, (i.e. equivalent to 200 ounces). If the price of gold finished at $480.10 when the seller closed their bet, the loss would be 500 points multiplied by the bet of $2 making a loss of $1000 in total. No commissions or taxes are levied in the UK on spread betting.

Derivatives
Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX), and Chicago Board of Trade (CBOT). In November 2006, the National Commodity and Derivatives Exchange (NCDEX) in India introduced 100 gram gold futures.

Mining companies
These do not represent gold at all, but rather are shares in gold mining companies. If the gold price rises, the profits of the gold mining company could be expected to rise and as a result the share price may rise. However, there are many factors to take into account and it is not always the case that a share price will rise when the gold price increases. Some of the following questions might be relevant before investing in the shares of a gold mining company: Has the company hedged the gold price i.e. already sold part of its future gold production through forward sales? Is the company already producing gold, or is it mainly exploring for gold? Does the company make a profit? How many years of ore reserves are left in the mines before they have to be closed down? What P/E ratio and dividend yield does the company have now and in the following years? Are the mines subject to political or economic risks?

Unlike gold bullion, which is regarded as a safe haven asset, gold shares or funds are regarded as high risk and extremely volatile. This volatility is due to the inherent leverage in the mining sector. For example, if you own a share in a gold mine where the costs of production are $300 per ounce and the price of gold is $600, the mine's profit margin will be $300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360, which actually represents a 20% increase in the mine's profitability, and potentially a 20% increase in the share price. Conversely, a 10% fall in the gold price to $540 will decrease that margin to $240, which actually represents a 20% fall in the mine's profitability, and potentially a 20% decrease in the share price. The amplification of gold mining profits during periods of rising prices can cause a gold rush in mining exploration.

In order to reduce this volatility many gold mining companies hedge the gold price up to 18 months in advance. This provides the mining company and investor with less exposure to short term gold price fluctuations, but reduces potential returns when the gold price is rising. The AMEX Gold BUGS Index is comprised of the largest unhedged gold stocks listed on AMEX (BUGS - Basket of Unhedged Gold Stocks). As of January 2007, the two largest stocks listed in the index were Goldcorp and Newmont Mining. The AMEX Gold BUGS Index (ticker symbol "HUI") has outperformed general gold mining stocks, represented by the Philadelphia Gold and Silver Index ("XAU"), over recent years.

Instead of personally selecting individual companies, some investors prefer spreading their risk by investing in gold mining mutual funds such as the Gold & General Fund by Merrill Lynch, or exchange-traded funds such as the Market Vectors Gold Miners ETF (NYSE: GDX) .

Investment strategies
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. Others point out that total mine production is only about 2,500 tonnes each year, leaving a 1,300 tonne deficit that must be made up by central bank or private sales.[7]. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity.

Gold versus stocks
The value of a "share" of the Dow Jones Industrial Average divided by the price of an ounce of gold. A surrogate index was used to generate all points before 1897. Chart generously provided by www.sharelynx.com

Gold's performance is often compared to stocks. They are fundamentally different asset classes: gold is a store of value whereas stocks are a return on value. In a stable political climate with strong property rights and little turmoil, one would expect stocks to significantly outperform gold. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold due in part to the stability of the American political system. This appreciation has been cyclical and it appears that the next 10 or more years will favor the performance of gold over stocks. An extrapolation of the long term trendline pegs the Dow/Gold ratio at roughly 20. As the end of the first quarter of 2007, that ratio was 18.76 and trending downward.

Technical analysis
As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically this involves analyzing chart patterns, moving averages and market trends, in order to speculate on the future 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
For many years, the dollar was pegged to the gold standard.
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 ounces gold - an increase of only 2.5 times.

The above numbers show the falling influence of gold in today's monetary system. Gold bugs believe, or 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.

The US 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. Jon Nadler, an analyst at Kitco Bullion Dealers, said gold was still benefiting from August 30, 2006 release of the minutes to the last rate-setting meeting of the US Federal Reserve. The minutes to the August 8, 2006 meeting, at which the Federal Open Market Committee kept short-term interest rates unchanged for the first time since 2004, supported the view that US borrowing costs have peaked.

Supply
In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes , which would form a cube with 20.03 meter edges. Global gold mine 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. 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 , prompting speculation to circulate 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 recognised 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.

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how to invesment in gold

Gold as a financial asset
Gold and other precious metals are assets that are both tangible and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible.

Considering its high density and high value per unit mass, storing and transporting gold is very easy. Gold also does not corrode. Historically, it was also very easy to verify that an offered coin had the density of gold through the use of Archimedes' principle. Today, however, some metals are denser than gold yet cheaper. While some think gold deserves special treatment based on its cultural value and use as money, others consider gold a commodity, like copper or lead.

For centuries gold has been used as a store of value. When viewed from the historical perspective of a multicentury time frame, no other investment has the wealth preserving power of gold. Other assets are dependent upon a certain government or political climate to retain value, appreciate, and not be excessively taxed, but gold is largely independent of political climate (with the exception of laws specifically confiscating gold as Franklin Roosevelt did). Gold investors believe that political and economic turmoil may have a negative influence on the value of their other investments, but the opposite effect on the value of gold.

Types of gold investor
Physical gold can be anonymous. Gold is a very soft metal, meaning that (assuming the gold is in the physical possession of the owner) a bar's serial number can be altered or obliterated with a hammer and chisel. Bullion coins typically will have no serial numbers in the first place. If the bullion's ownership is not recorded anywhere the gold can become untraceable. Cacheurs seek to hide part of their wealth from their spouse, family, tax authorities, creditors, thieves, invaders or others. The density of gold allows them to store a large value in a very small space, without fear of depreciation or erosion over a long period of time.
Central banks
Although central banks as a whole have been net sellers of gold over the last few years, some have been buyers. A central bank may invest in gold in order to ensure that part of its reserves are held in a liquid and tangible form which could be used quickly in times of crisis. Most central banks keep the majority of their reserves in USD, but like any other investor diversification makes sense. The dollar is a liability of the United States of America. Its value thus depends on the USA honoring it in exchange for goods or services. Central banks may fear that in a time of crisis, or if there were a USD crisis, dollars may not prove to be useful. This might happen if sanctions or exchange controls exist. The banking system may make it hard to move USD if restrictions were imposed.
Currency speculator
Since the main gold market is priced in US dollars, speculators who believe the dollar will decline may buy gold. They think that if the dollar declines, the gold price will remain constant in other currencies, thus rising in terms of the U.S. dollar. Gold may also be bought if they feel that a different currency will decline, since they expect the dollar price to be stable, but the foreign currency price to rise.
Financial institutions
Banks and funds may invest in gold to protect themselves against potential loss on gold linked products that they have issued. These may include gold certificates, options, forward contracts, gold linked notes and other products containing a derivative feature linked to the gold price.
Gold bug
Gold bugs, in the traditional sense, believe in, fear, or even hope for another Great Depression or Armageddon, and believe that by holding gold they will survive and prosper.
Hoarder
Some investors consider gold as a long-term store of value and invest in it to maintain their purchasing power. By buying gold and hanging on for the long term, they believe they can keep their wealth intact.
Libertarian
Libertarians may use privately issued digital gold currency, in preference to fiat currency, for reasons such as lack of trust in fractional-reserve banking or monetary policy.
Petroleum speculator
There is a strong historical correlation between the price of oil and the price of gold. The general rule is that the price of an ounce of gold is 10 times the price of a barrel of oil. This is in part because mining gold is an energy intensive process, the cost to mine an ounce of gold will increase as the price of oil increases and in part because they are both commodities and often affected by the same economic stimuli. Buying gold is one way for a speculator to bet on the price of oil going up.
Portfolio hedger
Similar to asset allocators, except the purpose of the investment is to hedge against rapid inflation or unforeseen calamities which may affect other investments negatively. These individuals believe that certain events, if they occur (e.g. war or economic crisis), may have a negative influence on the value of their other investments, but the opposite effect on the value of their gold.
Speculator
Speculators attempt to make a profit by predicting the gold price. They may think that macroeconomics are affecting the demand for gold, or believe they have detected a market trend showing them the future price direction.
Espionage
The survival kit issued to US and British Fighter Pilots includes gold sovereigns to help bribe local officials independent of local currencies . In the James Bond books by Ian Fleming, James regularly travelled wearing a belt containing 20 gold sovereigns.

Gold price
The usual benchmark for the price of gold is known as the London Gold Fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day.

Factors influencing the gold price
This ancient Egyptian golden bowl was buried in the tomb of a pharaoh and today sits in the British Museum. Gold items were often buried with pharaohs to use in the after-life, because gold is free from corrosion or decay.

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, since almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. Given the huge quantity of above ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production or gold jewelry demand.

Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organisations held 19 percent of all above ground gold as official gold reserves. The Washington Agreement on Gold (WAG) which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 400 tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, have been key sellers of gold over this period.

In November 2005, Russia, Argentina and South Africa expressed interest in increasing their gold holdings. Other than Russia, these are not viewed as significant central banks, but any move by Japan, China or South Korea to do the same would be seen as significant. Currently the United States Federal Reserve has 16% of its assets in gold, whereas China holds approximately 1% in gold.

Although central banks do not generally announce gold purchases in advance, some such as Russia have expressed interest in growing their gold reserves again as of late 2005. In early 2006, China, who only holds 1.3% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Many bulls took this as a thinly veiled signal that gold would play a larger role in China's reserves, which they hope will push up the price of gold.

Inflation fears have also been influential in the past. The October 2005 consumer price index level of 199.2 (1982-84=100) was 4.3 percent higher than in October 2004. During the first ten months of 2005, the CPI-U rose at a 4.9 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 3.3 percent for all of 2004.

Inflation 1923-24: A woman in Germany feeds her tiled stove with money. The money was worth less than firewood.

A 500,000,000,000 (500 billion) Yugoslavia dinar banknote circa 1993, the largest nominal value ever officially printed in Yugoslavia, the final result of hyperinflation. Photo courtesy of National Bank of Serbia.
Sentiment
It used to be said that "Gold is the world's frightened bunny". Whenever crisis threatened, the demand for physical gold increased.
Bank failures
When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.
Inflation
Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation. Historically, currencies have lost their value in this way over time. In times of inflation, people seek to protect their savings by purchasing liquid, tangible assets that are valued for some other purpose. Gold is in this respect a good candidate, since producing more is far more difficult than issuing new fiat currency, and its value does not rely on any particular government's health.
Low or negative real interest rates
Gold has a long history of being an inflation proof investment. During times of low or negative real interest rates when significant inflation is present and interest rates are relatively low investors seek the safe haven of gold to protect their capital. A prime example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.
War, invasion, looting, crisis
In times of national crisis, people fear that their assets may be seized, and the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
Production
According to the World Gold Council, annual gold production over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes.
Demand
About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.
Supply and demand
Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and available for sale at a price. However, supply and demand do play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold exchange-traded fund, but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.

Methods of investing in gold
Investment in gold can be done directly through ownership, or indirectly through certificates, accounts, shares, futures etc.
Other than storing gold in one's own safe deposit box at a bank, gold can also be placed in allocated (also known as non-fungible), or unallocated (fungible or pooled) storage with a bank or dealer. In the case of the latter going bankrupt, the client will be unable to claim the gold and would become a general creditor, whereas gold held in allocated storage should be returned to the client in full. However even with gold held in allocated storage, many gold bugs would still choose their storage provider carefully, making sure of high net worth, with some preferring an offshore bank or storage facility.

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