What is the real value and use of gold?

WHAT is the real value of gold? Gold has industrial uses, especially in the electronics industry where it is used for electrical wiring due to its high conductivity. However, close to two-thirds of its demand is for jewellery, particularly in India and China.

Increasingly, it is being used again as a store of wealth as investors lose confidence in paper money, hedge against inflation or worry about economic and political turmoils. Other than buying physical gold, investors can invest in gold exchange traded funds (ETFs). SPDR Gold Trust, the largest gold ETF with a market capitalisation of over US$41bil, holds over 1,100 tonnes of gold.

Money could as well be in the form of sea shells and indeed Pacific islanders used sea shells as money. Before paper money, what constituted money came in many forms – sea shells, salt, leather, copper, silver and gold. Money was used as a store of wealth which could be used to purchase goods and services without resorting to barter trade. It was in the world’s oldest civilisation, Mesopotamia (in modern Iraq), where metal coins were introduced around 2500 BC. Gold is valuable only because it is perceived so in the collective psyche of the human race, hence its value is subjective and relative to other alternatives. To be valuable, something has to be rare and desired.

In all of history, only 161,000 tonnes of gold have been mined, barely enough to fill two Olympic-size swimming pools, according to a January 2009 National Geographic article. To be valuable and used as money, it has to be something durable. That would exclude fair maidens as their perceived value in the eyes of lustful men may diminish with age. Still, without the demand of gold from the fairer sex, its value would be much lower.

In Einstein’s theory of special relativity, time is relative to speed but if we apply the theory of relativity to the perception of value, the relative value of goods and services is determined by comparing the desirability of one versus another just as we compare the relative attractiveness of bonds, real estate, gold and stocks.

Even within the same asset class like stocks, we apply the relative yardstick – should we buy DiGi or Maxis? The relative attractiveness is determined by supply and demand, interest rates, growth and dividends for stocks, personal preferences and many other factors. The fact that the prices of stocks, bonds and commodities quoted on exchanges are so volatile is a reflection of not only genuine supply and demand but also human psychological factors which cause irrational exuberance or pessimism.

The Chinese introduced paper money during the Tang Dynasty (618-907) and with that they also invented hyperinflation when a large amount of paper money was introduced.

How does printing money cause inflation? In a simple hypothetical world where US$100,000 of paper money can only buy you a bar of gold or a house, doubling the paper money to US$200,000 does not create new wealth but merely causes the value of the bar of gold and the house to rise from US$100,000 to US$200,000, an inflation of 100%.

Wealth transfer

Printing of money merely results in a wealth transfer from the saver (who can buy less with paper money) to the government (as it can use the freshly created money) and borrowers (decline in the real value pf debt). Gold is perceived as an inflation hedge and a store of value. (See chart) Its price spiked in the late 1970s when the US and world inflation surged. The price is surging again due to diminishing confidence in paper money.

World governments are all undertaking fiscal stimulus to counter the economic slowdown. These large budget deficits eventually have to be financed by higher taxes but with unemployment in the United States at over 10%, politicians with an eye on getting re-elected may be tempted to print money to finance the budget deficits and bailouts.

Hence it is not surprising that with the United States, British and Japanese governments printing money, investors are flocking to buy gold or commodities which are a better store of value as their supply does not grow as fast as printed paper money.

The printing of money by the US government also puts other currencies at risk as over 60% of foreign reserves are held in US dollars. As the gold standard has been abolished, paper money cannot be converted to gold. No wonder the Indian government has decided to sell some of their US dollar reserves for gold. Perhaps the currencies of larger countries like Australia are relatively safer as they are sitting on large yet-to-be-mined gold reserves even as their US dollar reserves lose value.

So, should the fair price of gold be relative to paper money? Though the value of gold may be subjective in the minds of investors, the reality is that the amount of gold in the world is finite, but there is no limit to the quantity of paper currency which can be issued.

Therefore it is not surprising that the value of gold is at a record high as more money is being printed. All this is premised on the assumption that we will continue to treasure gold, which is likely to be the case as we have done so for millennia.

Choong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd

NEW YORK: Gold prices finished higher for a sixth straight day Friday, rising even as the dollar strengthened.

The December contract added $4.90 to settle at US$1,146.80 an ounce on the New York Mercantile Exchange.

For the week, prices gained 2.7 percent.

Gold has been on a record-setting climb since early September as investors looked for an alternative investment to a falling dollar.

Gold is considered a good hedge against a weak greenback because of its stable store of value.

The dollar, however, has shown some strength in recent days.

On Friday, the ICE Futures US dollar index, a widely used measure of the dollar against other currencies, rose for a second day in a row, gaining 0.4 percent in afternoon trading.

As investors grow more cautious over the sustainability of the economy's recovery, they have begun to shift money out of risker assets like stocks and commodities and back into safe-haven investments like the dollar and Treasurys.

Gold is also considered a safe-haven asset, so prices have held up amid the dollar's strength.

"When the dollar rebounds, I don't think it's a safe assumption that everyone will run from gold," said Jason Toussaint, managing director of investment at the World Gold Council.

There are investors who are holding gold "for preservation purposes," he said.

Some analysts have expressed concern that gold could see a sharp correction after such a rapid ascent.

But the consensus seems to be that gold prices have more room to run.

"We still expect to see attempts at higher levels," said Jon Nadler, senior analyst at Kitco Metals Inc. in a research note Friday.

Other metals were little changed.

source: the star online

How to invest in gold

HISTORICALLY, gold is perceived to be a safe haven during uncertainties and economic crises as it is considered more stable than other asset classes. It is generally an effective hedge against inflation and fluctuations in the US dollars.

Gold is an investment tool for preservation of wealth and a store of value in times of market volatility. It is an asset diversifier that could lower the overall risk in an investment portfolio.

In the previous article, we discussed the benefits of investing in precious metals and particularly gold. This article will focus on different ways to invest in gold.

Gold and gold-related funds

Gold and gold-related funds are unit trust funds that allow individuals, corporations and institutions with common investment objectives to pool their money for investment in gold and other precious metals. Professional fund managers then use the pooled money to acquire assets which will help meet those objectives.

Generally, a gold fund invests in gold mining equities and/or gold bullion accounts, while a gold-related fund invests in gold and other precious metals including platinum, silver, rhodium and palladium.

"By investing in such funds, investors benefit from diversification in their investments as fund managers buy stocks in more than one gold mining company or more than one type of precious metal," said Datin Maznah Mahbob, chief executive officer, Funds Management Division of AmInvestment Bank Group.

The funds also provide investment opportunities that allow investors to benefit from the investment expertise of fund managers who manage the funds.

In Malaysia, the only gold fund is opened to high-net-worth individuals with the minimum investment set at US$150,000 (RM513,000). For gold-related funds, investors can invest as little as RM1,000 to enjoy diversification in their investments and take advantage of professional fund management.

Gold exchange traded fund

An ETF is a unit trust, listed and traded on a stock exchange. It is an open-ended fund that tracks or follows the performance of a benchmark index.

An index is made up by a basket of securities and usually reflects the movement of an entire market. This gives ETF investors the opportunity to invest in a pre-packaged basket of securities of an index rather than just an individual security.

"Gold ETFs allow investors to buy and sell gold ETF units just like how they trade stocks on a stock exchange. Generally, gold ETFs track gold indexes or the price of gold. The ETFs invest in gold mining stocks to track the gold index," she added.

Gold ETFs, which track the price performance of the gold bullion, enable investors to participate in the gold market without taking physical delivery of gold. This is because it is 100 per cent backed by physical gold held mainly in allocated form. Allocated gold refers to the gold kept in a vault under a safekeeping or custody arrangement and the investor has total ownership to it.

The first gold exchange-traded fund Gold Bullion Securities listed on the Australian Stock Exchange since March 2003 is fully backed by gold, which is deposited and insured.

For SPDR Gold Shares listed on the Singapore Stock Exchange, the underlying gold is stored in the form of 400 ounces London Good Delivery bars in a bank vault.

"Gold ETFs are considered a passive investment. This means that upward movement of gold prices or gold indexes will be followed by the appreciation of ETF unit prices," said Maznah.

There is no gold ETF offered in Malaysia yet, but local investors can invest in Singapore-listed SPDR Gold Shares which are available closer to home. They need to have a foreign trading account offered by a local securities firm to trade the ETF. On top of that, their investment is subject to currency risk since the gold price is quoted in US dollars while the ETF is in Singapore dollars.

Physical gold investment

Some investors prefer to invest in physical gold including jewellery, gold bars and coins to have physical possession of the assets. Gold is an asset appreciated for its intrinsic qualities and beauty.

Investors have the option to buy gold bars in a variety of weights and sizes, ranging from one troy ounce to 400 troy ounces from some banks and jewellery shops. For instance, a local gold trading company offers gold bars and coins of 20 grams at RM2,415, 50 grams at RM6,010, 100 grams at RM11,964 and 1 kilogram at RM119,644 as at September 15 2009.

Investors can also invest in bullion coins offered in different weights of 1/20, 1/10, 1/4, 1/2, and one ounce. The actual value of bullion coins is based on the daily gold price and the gold content. They can buy bullion coins including the American Eagle, Australian Kangaroo Nugget and the Canadian Maple Leaf.

"To make direct investment in physical gold, investors need to set aside a bigger sum of investment compared to buying units in gold funds and gold ETFs. It is not as convenient as they have to think about safe storage and insurance for the precious assets," added Maznah.

Mining stocks

Mining stocks or equities are shares of ownership of a precious metals mining company. The stocks entitle the investor to receive profits from the operations of the company, usually by payment of a dividend, and to any voting rights attached to the stocks. Factors affecting the appreciation potential of a gold mining stock include market expectations of the future gold price, the future earnings and growth potential of the company, mining costs, and the likelihood of additional gold discoveries.

In general, prices of gold mining equities are more volatile than gold prices, thus some gold mining company equities decline when gold prices increase. The short-term volatility of the equity prices could be due to some gold mining companies hedging their future output using gold futures contracts. In the long-term, generally prices of gold mining equities could match the longer-term price trends of gold bullion.

"Investors do not enjoy diversification in their investments when they buy stocks of one gold mining company. They need to allocate more money to buy stocks of different companies to diversify their holdings," explained Maznah.

Gold passbook account

Another option is investors can buy gold in 999.9 fineness using a gold passbook account. Whenever they buy and sell gold, the transactions will be recorded in a passbook provided to the account holders. With the account, they can buy and sell gold at daily quoted gold prices for 1 gram in Malaysian ringgit. The account is normally backed by physical gold.

There are banks in Malaysia that require investors to deposit and trade a minimum of 5 gram of gold. The bank allows investors to make withdrawal in either physical gold or cash credited to their deposit accounts. They will incur a conversion charge inclusive of the shipping and insurance for the physical withdrawal.

One of the disadvantages for this type of investment is account holders do not get any interest or dividend for their investment. They generate profits only if they sell the gold at a higher price compared to their initial investment. The banks normally impose a charge of up to 5 per cent based on the gap between the selling and buying prices to cover administrative and storage expenses.

Conclusion

Now that you have understood the different ways of investing in gold, you need to compare them in terms of diversification, affordability and the advantage of professional management. On top of that, you should consider and select the investment options based on your risk tolerance as well as investment goals and objectives.

source: Business Times

How Warren Buffet Made His Billions

Warren Buffett is a man who has made millions but he also started working at his father’s brokerage when he was 11 years old, that’s an age when most other kids were playing hide-n-seek and didn’t know how to spell ‘brokerage’..

This financial wizard is by recent estimates, worth $46 billion but how he got there is the fascinating story.

It all began in the family grocery store back in Omaha. Buffett’s great grandfather started the store in 1869 and it was in the Buffet family until 1969, till his uncle finally retired. But it’s at this store, where he began going around his neighbourhood selling gum. This was before his stint at his father’s firm.

Warren Buffett told CNBC’s Liz Claman, “My grandfather would sell me Wrigley’s chewing gum and I would go door to door around my neighbourhood selling it. He also sold me six Coca Cola for a quarter and I would sell it for a nickel each in the neighbourhood, so I made a small profit. I was always trying to do something like this.”.

From small beginnings come bigger things and so after selling gum, soft drinks and working with his father, by age 14, he had bought a 40 acres farm in Washington, Thurston County..

But he confesses that he never enjoyed the farm as much as he enjoyed investing in stocks. But the first stock he bought was “Citi Service preferred stock. I had three shares and made all of $5 on it. I had bought it at $38.25 and then I sold it around $40, it went down to $27 in between and after I sold it at $40, it went to $200!”.

From that poorly timed stock sale in 1944, he learnt a lesson that became his legendary investment strategy - which is essentially - patience pays, so buy them and hold them. He figured out two other critical things about himself in the 1940s - what he is good at and what he likes to do.

This pivotal moment in his journey came in 1956, when he was just 25 years old. This man who was rejected by Harvard and now armed with contributions from family and friends and $100 of his own money starts a limited partnership with seven people.

Over the next nine years, Buffett turned a $105,000 into $26 million - a stunning 24,000 per cent increase! He had invested mostly in textile companies, farm equipment manufacturers and even a company making windmills.

Thirteen years later, Buffett forms another partnership that becomes one of the greatest teams in the history of investing. He convinces longtime friend Charlie Munger to quit his investment partnership to join Buffett as his Vice President of Berkshire Hathaway.

And now with the 82-year-old Munger, Buffett sits on top of the greatest holding companies ever.

So, it’s understandable that this man is looked up to for investment and business advice all the time. But what’s the secret gift he’s got? How does he pick the right investments all the time? He explains, “I look for something that I can understand to start with, there are all kinds of businesses I don’t understand.”.

“I don’t understand what car companies are going to do 10 years from now, or what software or chemical companies are going to win/do ten years from now but I do understand that Snickers bars will be the number one candy company in the US - like its been for 40 years. So, I look for durable competitive advantage and that is hard to find. I look for an honest and able management and I look for the price I’m going to pay.”.

While Buffett’s big acquisitions have made headlines; wise investments in companies like Coco Cola, the Washington Post and Gillette have provided the capital to make those acquisitions possible. Since taking control of Berkshire in 1964, the company has acquired 68 subsidiaries. In March of 1964, Berkshire acquired its first insurance company National Indemnity.

In 1972, See’s Candies for $25 million, in September of 1983, Nebraska Furniture Mart and Borhseim’s in 1989. In 1998, Berkshire acquired Dairy Queen and Geico in January, Net Jets in August and General Re Corp in December. In April of 2002, Fruit of the Loom and most recently Buffett is looking abroad for new business.


Recently, he bought 80 per cent of the Israeli Metal Works Company and he did it without even seeing it. He was approached by the promoter via a letter and what was in that letter convinced him that ‘this was the kind of the person I wanted to do business with and it is the kind of business we wanted to own.’ How does this ‘daring bit of investment fit in with his usual careful way of investing?.

He explains, “I had to size up the business but that’s a background of being in stocks. If you put your whole net worth in stocks when you are 20-21 years old - you have not visited the businesses but you are really analyzing their financials, you are trying to assess whether they have durable competitive advantage, assess the quality of the management and the integrity of the management and then you try to figure out whether you are buying it at a reasonable price and that’s it, that is all we do.”

He’s never had anything lacking - his acute business brain has made him a lot of money. He also feels that the youth of today are living better than John D Rockefeller. His own style remains the same - he lives in the same house for 48 years, carries no cellphone, has no computer on his office desk, does not move around with an entourage.

As he puts it, “I have had everything I wanted all my life. At 20, I was having the time of my life doing what I did. Today, I’m eating the same things I always eat - burgers, fries and cherry coke. Only my clothes are more expensive now but they look cheap when I put them on!”.

At 76, he married his long-time companion, Astrid Menks at a low-key ceremony at his daughter Susan’s house. He is also amazingly healthy for someone on a burgers-coke diet. He’s also surprisingly down to earth. He moves around freely unencumbered by a security detail. He does have a few guards with him during the annual shareholders meeting but he says he doesn’t feel the need to put himself in a cocoon.

Which probably explains, why he wasn’t nervous about visiting a factory in Israel, which is close to the Lebanese border. He says of that visit, “Our plant there is about 8-10 miles from the Lebanese border and there were maybe a rocket or two that hit the parking lot or something like that but it can be dangerous being in this (US) country as well.”.

Buffett is comfortable in Omaha in part because people leave him alone with the exception of a random fan or two. This billionaire doesn’t even have a chauffeur - he drives himself around in a 2006 Cadillac DTS, recently purchased after he auctioned off his old Lincoln Town Car, which was famous for its Thrifty license plate. And no, he does not want a yacht or many mansions. He just wants to be left alone to enjoy a good football game in his sweatsuit on a big screen television - with popcorn.

It’s really no surprise that America’s most prominent investor chooses to live far from the nation’s wealthy-elite in New York, Los Angeles, Chicago and Miami. He says that when he was in New York, he had about a 100 ideas about where to invest but it was over-stimulation.

In Omaha, he needs one good idea in a year and he feels he can think better and with less distraction. He feels there is a sense of community in living there.

His investing theories have been talked about ad nauseum by almost every business/finance writer and is a cottage industry all by itself.

But one he finds closest to reflecting his views is a book written by Larry Cunningham - ‘The Essays of Warren Buffett - Lessons for Corporate America’ is required reading in a one of a kind course start at the University of Missouri School of Business.

The course is called Investment Strategies of Warren Buffett. It turns up Buffett is hot on campus too. The class now in its eighth year and is the brainchild of Buffett’s friend Harvey Eisen.

Harvey Eisen recalls, “This course is a breakthrough in terms of reality meeting academics. I said why don’t we have a course like this and the academics scratched their head and said ‘well we don’t’ and I said ‘why don’t we’ and then we got it done.”.

Dean of the University of Missouri School of Business Bruce Walker bought the idea. He says, “We want our students to be exposed to many different approaches to investing.”.

The Buffett playbook is taught, analysed and written about but it is best summed up like this.

Harvey Eisen explains it, “
Number one - Don’t lose the money and
Number two - don’t forget rule number 1!
Number three - look for unique companies that are hard to replicate - he calls
that a moat around the business.
Number four - he talks about the circle of competence, which means in simple
English, do what you know..

“Everybody in the stock market knows about the economy or about the Federal Reserve. Warren focuses on what he knows and he has made enormous successes at that.”

He does not want his managers to report in at any committee meeting of any kind and he lets them get on with the business of running their businesses. But there is one thing he requires of each CEO. Buffett says, “I asked them to send me a letter, that I would keep in a private place that will tell me what to do tomorrow morning, if they are not alive in terms of their successor.”

But what about his own successor? He says, “The succession plan is very simple. Our board met a few days ago and we talked about that every in single meeting and we have at least three people inside Berkshire, who in many respects will do my job better than I do. I can’t give you the names but the board knows which one of those three they would pick, if something happened to me.”.

Warren Buffett has also given away $31 billion of his fortune to the Bill & Melinda Gates Foundation and he ‘hopes it will accomplish just what they have set out to accomplish. I have observed their Foundation very carefully and Bill & Melinda decided initially they were spending about a billion a year. They have decided they were going to try and figure how they are going to save most lives, relieve the most human suffering.’

Ultimately, that’s what money is really meant for, isn’t it?


Source : http://www.rediff.com/money/2006/dec/26buffet.htm

How to Measure Returns

Azizi Ali, one of our famous local millionaires not only accumulates wealth for himself, but also help others achieve the same by training and imparting his knowledge. I found this topic quite interesting as I get questions or statements from friends and family members who say that market is down, so don't invest! or I'd want to monitor my fund performances on my own (mutual funds, to be exact) so that I know how much returns I'm making..

Special Report: How to Measure Returns
by Azizi Ali

"I made fifty thousand in the stock market in 99!" an acquaintance proudly declare. In fact, it was so loud, he was practically screaming in your ear. Which kind of make you feel inadequate because you only made ten grand. So you quickly change the conversation subject to the mating rituals of extinct Sagittarian Mongolian bisons.

But hold on a second. Though it's true that you made less money than him, it does not necessarily mean that he is one up on you. Because we are only talking of straight figures so far. And that is not how return on investment are calculated.

The correct way of measuring returns is in two ways: in percentage form and on an annual basis.

Return must be expressed on a percentage term

Return expressed in straight ringgit/dollar/yen has little meaning. This is because straight ringgit amount do not reveal the amount of money that had to be invested in order to earn that return.

For example, is RM10,000 a good return? The answer is that it depends on the amount invested. If RM50,000 was invested, then RM10,000 would be an excellent return as it is a 20% return. However, if the original investment was RM500,000, then the return is a measly 2%. If his layout was five million instead, then he would have cried as his return is...0.2%! Pass the tissue paper, please.

Return must be expressed on an annual basis

But the job doesn't end there. Even after expressing the return in percentages, it must also be expressed on an annual basis. This is the universally accepted way of stating a percentage return.

Following the earlier example; if the RM10,000 return from the RM50,000 was realized after just 6 months, then the annual return is 44% (The return is 44% instead of 40% due to the compound effect). And even if the investment was cashed out after that six months, we would still consider the return as 44%.
If on the other hand, the RM10,000 was realized at the end of two years, then the return is only 9.54%. (Again, the 9.54% return instead of 10% is due to the compounding factor).

So now you know that the return of x % in y number of years - often quoted by fund managers - is not the right way of indicating return on investment. A 50% return in five years may look good but that is only 8.44% annual return.

Then we can compare

Once we have the returns expressed in percentage form and on an annual basis, only then we can compare the various returns from different investments. Only then the comparison be fair and sensible. Orange to orange, durian to durian.

Coming back to the beginning example, if the guy made RM50,000 from investing RM500,000, his return on investment is 10%. Not bad. Something to crow about, I suppose.

But since you made the ten grand by investing only RM20,000, your return is a fabulous 50%! Whaddaya know - You are the winner!

Now you can go back talking about sex and dead Sagittarian Mongolian bisons.

Can You Continue To Invest In China?

There was a BIG hype before the Beijing Olympics, major financial news indicating that the share prices of China and the Greater China were to soar higher. To a certain extent it was true. When the global economic slump began, China was one of the worst to be hit. In the below table, you can see the market returns of many countries/region.

Market Returns from 2 January 2008 to 30 September 2008.

Market	Index	Returns
India	SENSEX	-44.9%
China	Hang Seng Mainland Composite	-40.0%
Asia ex-Japan	MSCI Asia ex-Japan	-38.3%
Korea	KOSPI Index	-38.0%
Thailand	SET Index	-36.0%
Emerging Markets	MSCI Emerging Markets	-34.2%
Hong Kong	Hang Seng Index	-32.3%
Indonesia	Jakarta Composite Index	-31.3%
Taiwan	TWSE Index	-29.6%
Malaysia	Kuala Lumpur Composite Index	-29.5%
Europe	DJ Stoxx 600	-29.5%
Singapore	FTSE STI Index	-29.0%
Asian Tech	Bloomberg Asia Pacific Technology	-27.5%
World	MSCI World	-22.5%
Tech	Nasdaq 100	-20.4%
Japan	Nikkei 225	-19.0%
US	S&P 500	-17.3%

Returns are in RM terms

Source: Fundsupermart

Now, the question is : Can You Continue To Invest In China?

According to Fundsupermart's research, '..should be prepared for short-term volatility. China equity funds are single-market funds which may exhibit greater volatility than regional funds in the short term – we suggest investors place China or Greater China equity funds in the supplementary portion of their portfolio, which usually takes up no more than 20% of an overall portfolio.'

Rick Aristotle Munarriz in his article, 7 Reasons to Remember China at The Motley Fool, mentions that '...as long as all seven of these companies keep growing, they will be big market winners in four years.'

'...China has the largest population in the world, and it has had economic growth in the last nine or 10 years of at least 9%, 10% or 11%. If the bubble bursts, maybe the economy grows at 7% a year. That's still greater than other economies in the world...' this should be noted as another strong point why China should be a good place for investment during bad times, as written on Street.com's China: 'The Best Place to Invest in the Next Five to 10 Years'

It will happen eventually, the question is when? So, in order to be on the safer side, never put the money that you would be needing in less than 5 years for investment.