Golden Times

Gold is the epitome of wealth and even today is still the stuff of many people’s dreams. Like any investment, investing in this precious metal is not without risk. But it does offer certain advantages.

Going back 2,000 years, you could buy a better Roman tunic for an ounce of gold. Today you would get a good suit for the same piece of gold. Even though the world has changed completely since Caesar was around, gold has kept its value, whereas the same cannot be said of numerous currencies, equities, and money market securities. The times in which gold was used as a means of payment are long gone, but this precious metal is still of interest to investors, monetary authorities, and speculators.

Constant Demand

More than a quarter of a century after the end of the Cold War, the global security situation is once again unstable. The desire for security has become more important. Many people believe that precious metals offer this security. “In the area of precious metals, investors are primarily interested in gold,” says Stefan Graber, Head of Commodities Strategy at Credit Suisse.

One aspect responsible for driving the continuing demand for this metal is its beauty: Most of the gold is processed by the jewelry industry, explains Graber. Although industrial use has decreased in recent years, it is still a major driver. The global central banks in emerging markets in particular are also still buying gold, in this way diversifying their currency reserves. Finally, private investors are also helping to keep demand and therefore the price high.

Diversifying Portfolios with Commodities

At Credit Suisse, gold is part of what are referred to as alternative investments in an investment portfolio. Depending on the risk pro fi le, around 5 percent of the invested assets in a standard portfolio are held in broadly diversified investments in commodities. Gold accounts for a part of this. “The cycle for changes in the prices of commodities is slow,” explains Graber. “They therefore complement the more traditional investments well.”

Unlike traditional investments such as equities and bonds, gold does not generate interest or dividends. You can only make a profit from it if the price rises. For some investors, gold is interesting because the price responds to many factors and therefore changes relatively frequently – a chance to make a quick pro fi t. For Stefan Graber, on the other hand, these sudden fluctuations in price are the very reason why a long investment time horizon is important when investing in gold.

The cycle for changes in the prices of commodities is slow. They therefore complement the more traditional investments well.

Stefan Graber, Head of Commodities Strategy at Credit Suisse

If the Real Interest Rate Decreases, the Price of Gold Increases

Viewed historically, the price of gold expressed in dollars rises when the greenback drops in value compared to other currencies. The real interest rates in particular are important here, in other words the change in the return on investment, taking inflation into account: If inflation expectations rise faster than the interest income for a currency, the real interest rates will fall. This tends to weaken the currency and boost the price of gold. Conversely, rising real interest rates generally hamper gold prices. The relationship between real interest rates and the price of this metal also explains the soaring price of gold since the financial crisis. This has tailed off again in recent years, but interest rates are still very low. This makes gold attractive for investors.

As with equities, however, it is virtually impossible with gold to predict daily changes in the price. Investors should therefore note that the function of gold as a means of protection against inflation and risks in the economy in general will only be effective in the long term.

Selling Gold Can Be Difficult

The big advantage of gold is that whoever owns physical gold – bars or coins – does not have to fear suddenly becoming the creditor of a bankrupt company. It is also not necessary to buy an expensive safe: The gold can be stored at a bank. Regardless of whether you want to rely on the security of your own mattress or the vault of a bank, large banks employ traders who can buy physical gold in the desired denomination for clients. This has the advantage that the buyer knows exactly where the commodity has come from. For not all gold is obtained in accordance with ethical standards, and some mines are situated in crisis areas. In the case of both bar gold and gold jewelry, consumers are increasingly keen to know where the metal has come from.

Large bars and coins also have their disadvantages, however. It may be difficult to sell the gold again quickly if you need money – and when you do, it is then only possible in relatively large units. The same applies to antique gold such as jewelry or old, unknown gold coins. In these cases, it is also important to clarify exactly how much the gold is worth and carefully choose a serious buyer. Fabio Luraschi from the coin dealership Erwin Dietrich AG in Zurich recommends first showing old pieces of jewelry at an auction house. It is possible that old jewelry may be of interest to collectors and will therefore fetch more at an auction than the mere material value. If this is not the case, a professional gold or coin dealer is the right point of call.

In the case of scrap gold such as jewelry or old, unknown coins, it is important to clarify exactly how much the gold is worth and carefully choose a serious buyer.

Fabio Luraschi from the coin dealership Erwin Dietrich AG

Rarely Worth the Wait

Anyone wanting to sell gold should do some research on the internet: Many dealers, some of whom also advertise with leaflets in the mailbox, pay far too little. Sellers who have already been given an offer by a dubious dealer are occasionally surprised by Luraschi’s much higher offers.

As a general rule, it is not worthwhile waiting forever to sell jewelry. In the case of individual pieces of jewelry, fluctuations in the price of gold will only make a difference of a few francs. It is different for larger quantities of several hundred grams. In this case, you can get more if you wait for the right moment. However, such large quantities are rare. Luraschi: “In my business in the center of Zurich, people only sell a total of a few hundred grams of gold per week.”

The Sale Price Is Not the Same as the Trade Price

600 %

For gold jewelry, the purchase price often includes a margin.

Unlike bar gold or precious metal traded on a stock exchange, jewelry is never a good investment. The purchase price often includes a margin of up to 600 percent,” explains Luraschi. “It’s like clothes.” If you want to buy gold and do not have the money for larger quantities, well-known coins such as Vreneli are recommended, he says. They are not too large, he explains, and they are easy to resell in Switzerland. The dealer will factor in a margin in any case, however. The sale price will always be higher than the trade price of pure gold. Jewelry in particular is also usually made from alloys. 18-carat gold is 75 percent pure, so the value of gold used in jewelry duly decreases by 25 percent.

If you want to buy gold and do not have the money for larger quantities, well-known coins such as Vreneli are recommended.

Fabio Luraschi from the coin dealership Erwin Dietrich AG

Paper Gold and Funds as an Alternative

To be able to trade with gold more quickly and in smaller units, there are several alternatives to bars, coins, and jewelry, explains Stefan Graber. You can buy what is referred to as “paper gold,” which is traded in the same way as foreign currencies and posted to a corresponding metal account. Paper gold is gold that is not present and stored in physical form. There are also funds traded on the stock exchange that reflect the price of gold through either direct investments or certificates. These products offer the advantage that an investor can normally sell them easily at any time. As with other financial products, however, there is still the remote possibility that the investment will be lost through bankruptcy. After all, there is no direct claim to gold purchased in this way. If your assets are managed by a well-run institution and you use gold as part of a wellthought-out investment strategy, however, it is easier to do this using funds or paper gold.

To make life easier, you can speak to the bank and place the investment work in the hands of experts like Stefan Graber. In this case, there is a good chance that a small proportion of the savings will be invested in gold. If you want to decide on each investment yourself, you should definitely factor precious metals into your deliberations.