The Premium on coins like Elizabeth II

December 30, 2024November 26, 2024 by Nithisha CHALLA

The Premium on coins like Elizabeth II

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) analyzes the economic factors explaining the premium on the collectible coins like the Elizabeth II coins.

Introduction

The financial world has long recognized the significance of precious metals, particularly gold, as a reliable store of value. However, beyond the traditional investment vehicles such as bullion bars and coins, there exists a subcategory of numismatic items—collectible coins—whose premiums can exceed the value of the metal content itself. Coins like the Elizabeth II coin series represent a growing segment of this market. While these coins are often minted with a fixed gold or silver content, their value can significantly outpace the value of the metal they contain. The difference between the face value or gold value of an Elizabeth II coin and its market value is commonly referred to as the premium. This difference represents a premium that can explained by several factors.

Elizabeth II bullion
Elizabeth2 bullion
Source: Hatton Garden Metals

Computation of the premium on coins like Elizabeth II

As an example, let us consider a 2022 Queen Elizabeth II Gold Sovereign coin. The gold content for this coin is 7.32 grams (0.2354 troy ounces of gold). In the beginning of 2024, the spot price of gold is $2,000 per troy ounce (or approximately £1,580 per troy ounce). The gold value (or intrinsic value) of this coin is equal to $470 (=0.2354×2,000) or approximately £372. The market value (including the premium) is $600 (or approximately £475). The premium, defined as the difference between the market value and the gold value, is then equal to $130 (=$600−$470) or approximately £103.

The Investment Potential of Numismatic Coins

Numismatic coins, such as those featuring Queen Elizabeth II, have long captured the attention of collectors and investors alike. Beyond their historical and cultural significance, these coins hold substantial financial value, often trading at a premium above their intrinsic metal content. Factors such as rarity, condition, historical context, and market demand significantly determine their market price and explain the premium. In this article, we delve into the economic factors of coins premium, focusing on the Elizabeth II series, their appeal, and their role as an alternative investment vehicle.

Understanding the Premium: What Sets These Coins Apart?

A premium refers to the additional cost above the intrinsic value of a coin’s metal content. For example, if a gold coin contains one ounce of gold, its inherent value will be based on the current market price of gold. However, a coin like the Elizabeth II Gold Coin could carry a premium because of its collectibility, historical significance, rarity, and demand among collectors. This premium is influenced by several factors: mintage numbers and rarity, condition and grading, and demand and market Trends.

Mintage Numbers and Rarity

The mintage number of a coin significantly influences its rarity, and by extension, its premium. Coins with limited mintage, such as special editions or proof versions of the Elizabeth II coin, typically see higher premiums due to their scarcity. For instance, a limited-edition Elizabeth II coin series celebrating the Queen’s milestone events (e.g., her Diamond Jubilee) would likely command a higher price compared to regular-issue coins.

Condition and Grading

Coins are often graded for their condition, which impacts their value. Coins in pristine condition (often graded as MS70 or PF70, which indicates perfect condition) carry a higher premium. This is especially true for coins preserved in perfect, uncirculated condition, making them rare in the market.

Demand and Market Trends

The demand for collectible coins is often driven by trends in the collector community. When a coin series, like the Elizabeth II series, becomes popular among investors and collectors, its premium increases as more people compete for a limited supply. Economic factors, including inflation, interest rates, and even geopolitical events, can also spur increased interest in collectible coins as alternative investments.

Notable Elizabeth II Coins

I give below a list of notable Elizabeth II coins:

1953 Coronation Crown: Issued to commemorate Queen Elizabeth II’s coronation, this coin is a prime example of how historical events can add numismatic value. While its melt value is minimal, its collectible value often exceeds 10 times its base worth.
2002 Golden Jubilee Coins: Struck in limited numbers, these coins saw a steep rise in market value due to their rarity and the significance of the Golden Jubilee celebration.
2022 Memorial Coins: Following Queen Elizabeth II’s passing, the Royal Mint issued special memorial coins, which have become highly sought after. Early buyers have seen considerable price appreciation, driven by emotional and historical factors.

Elizabeth II coin for the 1953 Coronation Crown
Elizabeth II for the 1953 Coronation Crown
Source: The Royal Mint

Elizabeth II coin for the 2002 Golden Jubilee
Elizabeth II for the 2002 Golden Jubilee
Source: The Royal Mint

Elizabeth II coin for the 2022 Memorial
Elizabeth II for the for the 2022 Memorial
Source: The Royal Mint

The Financial Benefits of Investing in Premium Coins

Diversification of Investment Portfolio

In the world of investing, diversification is often touted as one of the key strategies for managing risk. Coins like the Elizabeth II series offer a unique opportunity for diversification. While traditional assets such as stocks, bonds, and real estate are subject to market fluctuations, gold, and silver coins tend to be less volatile and are often viewed as a hedge against inflation or economic uncertainty (see Erb and Harvey (2013, 2024) for a discussion).

Additionally, premium coins are not just an investment in the precious metals market; they also offer exposure to the world of collectibles, which can experience appreciation independent of broader financial markets. Investors looking to diversify into non-correlated assets may find that numismatic coins, like those in the Elizabeth II series, provide an attractive avenue for diversifying their portfolios.

Appreciation Potential

One of the primary financial attractions of premium coins is their potential for appreciation over time. The value of a collectible coin is driven by both the fluctuating value of the precious metal it contains (gold, silver, etc.) and the coin’s numismatic value. As demand for specific coins rises, their premiums can increase exponentially.

For example, a gold Elizabeth II coin bought at a premium in the 1990s could be worth several times its original purchase price today, due to both the rising price of gold and the increasing demand for coins tied to the late Queen’s reign. Investors in these coins have seen capital appreciation not only from the metal price but also from the unique value placed on these coins by collectors.

Figure 1 below gives the evolution of the gold price over the period January 1971-September 2024.

Figure 1. Evolution of the Gold price
Gold price chart January 1971-September 2020
Source: Wikipedia

Tax Benefits and Legacy Planning

In some jurisdictions, numismatic coins, such as the Elizabeth II gold coins, are subject to favorable tax treatment. Depending on the country, these coins may be exempt from certain sales taxes or capital gains taxes, further enhancing their attractiveness as an investment. The tax advantages, when combined with their appreciation potential, make them an appealing choice for long-term investors seeking wealth preservation.

Additionally, premium coins are often used in legacy planning due to their tangible value, portability, and emotional appeal. Families pass down coin collections across generations, ensuring that the wealth embedded in these coins remains intact and grows over time.

Risks and Considerations for Investors

While coins like those featuring Elizabeth II can be lucrative investments, they are not without risks:

Market Volatility: The numismatic market can be unpredictable, with premiums fluctuating based on collector sentiment and economic conditions.
Liquidity Challenges: Selling collectible coins at premium prices requires access to the right buyer market, which may not always be readily available.
Authentication and Grading Costs: Ensuring the authenticity and proper grading of a coin often incurs additional costs, which should be factored into investment decisions.

Finally why Coins Featuring Elizabeth II Remain an Attractive Investment?

Coins bearing Queen Elizabeth II’s effigy offer a blend of historical appeal, tangible value, and investment potential. The enduring legacy of her reign adds a unique emotional and cultural dimension that elevates their demand. From a financial perspective, these coins offer diversification benefits, a hedge against inflation, and the potential for significant capital appreciation.

Conclusion

Investing in premium coins such as those featuring Elizabeth II requires a balance of sentiment and financial analysis. While their cultural and historical value is undeniable, their economic worth hinges on factors like rarity, condition, and market trends. For investors, these coins are more than just collectibles; they represent a fusion of history and finance, offering opportunities for both preservation of wealth and long-term growth.

Why should I be interested in this post?

As financial markets become more volatile and inflationary pressures rise, the appeal of premium coins as an alternative investment will likely continue to grow. These coins not only provide an investment in precious metals but also represent a tangible, legacy-building asset that can be passed down through generations. For students seeking to understand and diversify their portfolios, learning about the premium on collectible coins presents an intriguing opportunity with considerable upside potential.

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Business

US gold bureau The History and Evolution of Queen Elizabeth II on Coins

Change Checker The History of Queen Elizabeth II Coins

The Royal Mint Museum Her Late Majesty Queen Elizabeth II on coins

Physical Gold Gold Coin Premiums Explained

Treasure Coast Bullion Group Gold and Silver Premiums: What You Need to Know

American Bullion What Does MS70 Mean, and Why Is It Important?

Other

Wikipedia Gold

Wikipedia Two pound coin

Rare Coins Vault Top 10 Most Valuable Elizabeth II Coins! | Rare Coins Worth Millions (YouTube video)

About the author

The article was written in November 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

The Gold Standard

December 30, 2024November 19, 2024 by Nithisha CHALLA

The Gold Standard

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explores the origins, implementation, and eventual decline of the gold standard, leading to the establishment of the Bretton Woods system, which redefined global financial stability in the post-World War II era.

Introduction

The concept of using gold as a basis for currency emerged in the early 19th century, aiming to provide a universally accepted standard of value for trade and to reduce inflation. Countries agreed that their paper currency could be exchanged for a fixed amount of gold, which limited the amount of money governments could issue, thus preventing inflation.

The United Kingdom was one of the earliest adopters, establishing the gold standard formally in 1821. The system allowed Britain to stabilize its currency and promote global trade, reinforcing its position as a leading global economic power. This model inspired other countries to adopt similar standards. By the late 19^th century, several countries, including the United States (1900), Germany (1873), and France (1873), adopted the gold standard. The U.S. had been on a de facto gold standard since 1879 and later officially adopted the gold standard in 1900 with the Gold Standard Act, and the practice became increasingly popular as global trade expanded.

The Gold Standard’s Role in Economic Stability

Some key features of the classical gold standard are exchange rates, price stability, and discipline in monetary policy.

Stabilizing Exchange Rates

One of the primary benefits of the gold standard was stable exchange rates, which encouraged international trade and investment. By fixing the value of their currencies to a certain amount of gold, countries reduced currency fluctuation, making trade more predictable.

Preventing Inflation

Price stability (low inflation) was demanded since governments could only print as much currency as their gold reserves permitted. The gold standard limited excessive money printing and helped prevent inflation.

International Trust and Trade

The gold standard fostered trust among trading nations because gold-backed currencies reduced the risk of devaluation. Trade partners knew they were dealing in stable, reliable currencies.

Countries that Opted Out of the Gold Standard

According to an article published by Cooper, R Dornbusch and Hall (1982), until the late 19^th century most countries were on a bimetallic standard, interspersed with occasional periods of inconvertible paper (as in the United States in the 1780s and the 1862-78 period, or Britain from 1797 to 1821). Some countries, such as China and Mexico, were only based on silver until the twentieth century. Holland and Belgium even switched from bimetallism to silver alone in 1850 on the grounds (following the California gold discoveries in 1848) that gold was too unstable to provide the basis for the currency. The United States adopted a de facto gold standard with the resumption of specie payment on the Civil War greenbacks in 1879 (some would say it was formal since the standard silver dollar was dropped from the coinage in the “crime of 1873”); it moved formally with the Gold Standard Act of 1900.

Though several countries opted for the classical gold standard, there were still many countries who chose to opt out because of economic challenges:

Economic Challenges and Opt-Outs: Some countries struggled to adopt the gold standard, especially those with weaker economies or limited gold reserves. For example, several Latin American countries and parts of Eastern Europe either delayed adopting the standard or abandoned it after a short period due to limited gold resources.
Flexibility vs. Stability Debate: Countries facing frequent economic crises found the gold standard too restrictive. By adhering to a strict gold-based system, governments had less flexibility to respond to economic downturns, which later became a crucial issue in the Great Depression.

The Great Depression and the Decline of the Gold Standard

During the Great Depression (1929–1939), many countries faced extreme economic challenges. The rigid nature of the gold standard prevented governments from increasing the money supply to stimulate growth, worsening the economic crisis.

In response, several major economies, including the United Kingdom (1931) and the United States (1933 under President Franklin D. Roosevelt), abandoned the gold standard to regain control over their monetary policies. This allowed them to inject liquidity into the economy, stimulating growth and reducing unemployment. The gold standard was briefly reinstated in a modified form, known as the “gold exchange standard,” but it was ultimately unsustainable in the post-Depression global economy.

Transition from the Gold Standard to the Bretton Woods System

After World War II, the world needed a new financial system to prevent the economic instability that had contributed to the Great Depression. The gold standard was no longer viable, but there was still a need for a stable international currency framework.

In 1944, delegates from 44 nations gathered in Bretton Woods, New Hampshire, to establish a new global monetary system. The Bretton Woods system introduced a modified form of the gold standard where the U.S. dollar became the central reserve currency, convertible to gold at a fixed rate of $35 per ounce.

Some key features of the Bretton Woods system were:

U.S. Dollar as the Global Reserve: Countries agreed to peg their currencies to the U.S. dollar, and in turn, the dollar was backed by gold. This established the U.S. as the central player in global finance.
International Monetary Fund (IMF) and World Bank: The Bretton Woods conference also established the IMF and the World Bank to oversee exchange rates, provide financial assistance, and promote economic development.

The figure below shows the dollar conversion price to gold bullion for the period 1914-2024.

Dollar conversion price to gold bullion for the period 1914-2024

Source: Wikipedia

By the 1960s, the U.S. began running significant trade deficits, and its gold reserves dwindled as foreign governments exchanged dollars for gold. The U.S. could no longer sustain the gold-dollar convertibility at the set rate of $35 per ounce. In 1971, President Richard Nixon announced the end of dollar convertibility to gold, effectively ending the Bretton Woods system. This decision led to a floating exchange rate system, where currencies were no longer tied to gold but fluctuated based on market forces.

Conclusion

The gold standard played a vital role in creating a stable economic environment and promoting international trade in the 19^th and early 20^th centuries. However, its rigidity limited countries’ ability to respond to economic crises, eventually leading to its abandonment during the Great Depression. The Bretton Woods system provided a middle ground, establishing a dollar-based standard that aimed to maintain stability while allowing more flexibility. However, as global economies evolved, even this system proved unsustainable, paving the way for today’s floating exchange rate regime.

Why should I be interested in this post?

Gold has been a key financial asset for centuries, acting as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. Understanding its investment options helps students grasp fundamental market dynamics and investor behavior, especially during periods of economic uncertainty.

Useful resources

Academic research

Cooper RN, R Dornbusch, RE Hall (1982) The Gold Standard: Historical Facts and Future Prospects, Brookings Papers on Economic Activity, 1982(1): 1-56.

Business

World gold council The Bretton Woods System

Federal Reserve History Creation of the Bretton Woods System

Other

Wikipedia Gold

Wikipedia Bretton Woods system

About the author

The article was written in November 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Fort Knox: the US Gold Reserve

December 30, 2024November 19, 2024 by Nithisha CHALLA

FortKnox: the US Gold Reserve

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explores the history of Fort Knox, its economic significance, the myths surrounding it, and its enduring importance.

Introduction

The origins of Fort Knox date back to the 1930s during the Great Depression, a period of severe economic downturn in the United States (U.S.). In 1936, the U.S. government constructed the facility in response to the need for a secure location to house the country’s growing gold reserves, which were essential to backing the dollar under the gold standard. The construction was overseen by the U.S. Treasury Department, and the fort was designed with cutting-edge security for its time, utilizing 16,000 cubic feet of granite, 750 tons of reinforced steel, and 4,200 cubic yards of concrete.

The figure below shows the Fort Knox facility in Kentucky.

Fort Knox
Gold reserve in the United States, Fort Knox
Source: US Funds

The legislative foundation of Fort Knox’s role in safeguarding America’s wealth comes from the Gold Reserve Act of 1934. This act established the control and management of the nation’s gold to stabilize the economy. The Treasury’s decision to centralize gold in Fort Knox allowed for more efficient management and bolstered public confidence in the nation’s monetary policy. The fort’s massive, highly fortified structure made it an impenetrable vault, setting a global standard for secure storage facilities.

The Role of Fort Knox in U.S. Financial History

During the era of the gold standard, Fort Knox was critical in maintaining economic stability, as the gold stored within it provided a foundation for the dollar. This system allowed the U.S. government to prevent inflation by limiting the amount of money in circulation to the amount of gold held in reserves, fostering economic stability. Fort Knox’s immense reserves helped ensure that the dollar was trusted globally, making it a linchpin in both national and international finance.

The gold standard era came to an end in 1971, under President Nixon, who made the historic decision to cease gold convertibility, effectively transitioning the U.S. to a fiat currency system. This policy shift changed Fort Knox’s role, as gold was no longer used to back currency. Nonetheless, Fort Knox’s gold holdings continued to serve as a reserve asset, a sign of wealth and security, giving the government a financial safeguard in times of economic uncertainty.

According to 2021 statistics by US funds, the top 10 central banks with the largest gold reserves have remained mostly unchanged for the last few years. The United States holds the number one spot with over 8,000 tonnes of gold in its vaults – nearly as much as the next three countries combined – and accounting for 79% of total reserves.

The below figure shows the Top 10 countries with the highest gold reserves (US$ Million) in the second quarter of 2024.

Top 10 countries with highest gold reserves

Source: Central Banks, Federal Reserve Bank of St. Louis, International Monetary Fund, World Bank, World Gold Council

Security Measures and Infrastructure at Fort Knox

Military Presence and Physical Security: Fort Knox is protected by the U.S. Army, with soldiers and highly trained security personnel safeguarding the facility. There are intense security measures, including 24/7 surveillance, motion detectors, alarms, and physical barriers.
Advanced Technologies: Though specific details are classified, Fort Knox is believed to have some of the most advanced technology for security, possibly including biometric access controls, reinforced gates, and even underground passages. Its security has inspired legends and pop culture references (such as the James Bond film “Goldfinger”), adding to its mystique.
Limited Access: Only a few individuals have ever entered the main vault. In 1974, several members of Congress and journalists were invited to see the vaults and confirm the gold, which was an unusual event to dispel rumors about the gold’s existence.

The Contents of Fort Knox

Gold Reserves: Currently in 2024, Fort Knox holds the highest gold reserves at approximately 8,133.46 tonnes, which make up about 72.4 percent of the US total reserves. At today’s gold prices, this would be worth hundreds of billions of dollars.
Other Assets: While gold is the primary asset stored, the vault has also been used to store other valuable items in times of crisis, such as the U.S. Constitution, Declaration of Independence, and other historical documents during World War II for safekeeping.
Gold’s Role as a Reserve Asset: Even though the U.S. operates on a fiat currency system, the gold at Fort Knox acts as a safeguard, providing the country with a tangible asset that could be utilized or sold in extreme economic crises.

Economic and Financial Relevance Today

Despite the shift to a fiat currency system, Fort Knox’s gold reserves continue to provide financial security. Gold remains an important asset because it is believed to offer a hedge against inflation as gold’s value tends to increase during inflationary periods as it preserves purchasing power (see Erb and Harvey (2013 and 2024) for a discussion). Even in a modern economic context, where paper currency is not directly backed by gold, large gold reserves contribute to economic credibility on the global stage.

Gold’s role as a stable asset makes it valuable in times of economic volatility. During financial crises or market downturns, governments and investors alike often turn to gold as a safeguard. For the U.S., Fort Knox remains a testament to financial prudence and a guarantee of economic resilience.

Conclusion

In conclusion, Fort Knox stands as a symbol of American financial strength, security, and heritage. Though its role has evolved over the years, it continues to be a key reserve asset, both financially and symbolically. The facility’s rich history, robust security, and enduring legacy contribute to its iconic status as one of the most secure locations on earth. As an economic and cultural symbol, Fort Knox reflects the resilience and security of the U.S. economy, holding a significant place in both national and global finance.

Why should I be interested in this post?

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Data

World Gold Council Gold Reserves by Country

US Funds Top 10 Countries with Largest Gold Reserves

Other

Wikipedia Gold

WikipediaFortknox

About the author

The article was written in November 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Relation between gold price and interest rate

December 26, 2024November 11, 2024 by Nithisha CHALLA

Relation between gold price and interest rate

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) provides an overview of the inverse relationship between gold price and interest rate, and how various factors affect the relation between them.

Introduction

Gold and interest rates often exhibit an inverse relationship, meaning that as interest rates rise, gold prices tend to fall, and vice versa. Unlike stocks or bonds, gold doesn’t generate income (like dividends or interest) and is often used as a hedge against inflation or economic uncertainty. For instance, during the early 1980s, the U.S. Federal Reserve raised interest rates sharply to combat high inflation, leading to a short-term drop in gold prices. In 2022, the Fed’s aggressive rate hikes led to a decrease in gold’s appeal, which resulted in a relatively stable but pressured gold market. However, this relationship is not always straightforward and can be influenced by various factors.

The Inverse Relationship

This refers to the mostly known two factors that cause the inverse relationship between gold price and interest rate, namely opportunity costs and currency exchange rates.

Opportunity Cost

One of the primary reasons for this inverse correlation is the opportunity cost of holding gold. When interest rates rise, traditional investments like bonds and fixed deposits become more attractive due to higher yields. As a result, investors may shift their funds from gold to these higher-yielding assets, reducing demand for gold and consequently its price.

Currency Exchange Rates

Another factor is the impact of interest rates on currency exchange rates. Rising interest rates can strengthen a country’s currency, particularly the US Dollar. A stronger dollar can make gold, which is priced in US dollars, more expensive for international buyers, leading to decreased demand and lower prices.

Or is it a complex relationship?

It is important to note that the relationship between gold and interest rates is not always straightforward. Other factors, such as geopolitical tensions, inflation expectations, and market sentiment, can also influence gold prices. For instance, during periods of economic uncertainty or geopolitical turmoil, investors may seek refuge in gold, even if interest rates are rising.

To navigate this complex relationship, investors should consider the following:

Diversification: Gold can be a valuable addition to a diversified portfolio, providing a hedge against inflation and economic uncertainty.
Long-Term Perspective: A long-term investment horizon can help mitigate short-term price fluctuations and focus on the underlying value of gold as a store of value.
Market Timing: While it’s challenging to accurately predict interest rate movements and their impact on gold prices, investors can consider adjusting their gold holdings based on economic indicators and market sentiment.

The Historical Perspective

Historically, gold has been seen as a hedge against inflation. When inflation rises, the purchasing power of fiat currencies declines, making gold an attractive investment. However, rising interest rates can sometimes counteract this inflationary pressure.

The 1970s

A period of high inflation and economic uncertainty led to a surge in gold prices. However, as central banks tightened monetary policy and interest rates rose, gold prices began to decline.

The 2000s

The global financial crisis of 2008 and subsequent quantitative easing measures by central banks led to a significant increase in gold prices. However, as central banks began to normalize monetary policy in the late 2010s, gold prices declined.

Many people believe that the price of gold is inversely related to interest rates. However, it is only partially true. In fact, gold prices are driven not by nominal rates (which are not adjusted for inflation), but by real rates (which are nominal rates adjusted for inflation). Investors should remember that what really matters for gold are real interest rates, not the federal funds rate or nominal yields.

The chart below represents the relation between real interest rates (the 10-year inflation indexed Treasury rate is a proxy for long-term U.S. real interest rates) and the price of gold for the period 2003-2016. It shows significant negative correlation between real interest rates and the price of gold.

Relation between interest rates and gold price
correlation between interest rates and gold price from 2003-2016
Source: Gold price forecast

The Role of Central Bank Policies

Central banks play a crucial role in influencing interest rates and, consequently, gold prices. When central banks implement expansionary monetary policies, such as quantitative easing, they inject liquidity into the economy, which can lead to higher inflation and increased demand for gold. Conversely, when central banks tighten monetary policy by raising interest rates, they can reduce inflationary pressures and dampen gold demand.

The Impact of Geopolitical Risks

Geopolitical tensions, such as wars, political instability, and trade disputes, can also impact the relationship between gold and interest rates. During periods of heightened geopolitical risk, investors may flock to gold as a safe-haven asset, even if interest rates are rising.

Conclusion

In conclusion, understanding the relationship between gold and interest rates is crucial for investors seeking to optimize their portfolios. By considering the various factors that influence this relationship and adopting a long-term investment perspective, investors can effectively navigate the complexities of the gold market.

Why should I be interested in this post?

Useful resources

World Gold Council Gold is moving with rates

Bullion by post Gold price and interest rate relationship

CBS news Here’s how interest rates impact gold prices

APMEX When Do Central Banks Buy Gold & How Do They Affect Prices?

Other

Wikipedia Gold

About the author

The article was written in November 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

World Gold Council

December 26, 2024November 11, 2024 by Nithisha CHALLA

World Gold Council

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) provides an overview of World Gold Council (WGC), its key roles and impact in shaping the global gold market.

Introduction

The World Gold Council (WGC) is a market development organization founded in 1987 to promote the responsible use of gold. It’s a non-profit organization that works with governments, central banks, jewelers, investors, and other stakeholders to shape the gold market. Its main purpose is to stimulate and sustain demand for gold and provide leadership on global issues that affect the gold industry. The World Gold Council website states information such as, “For instance, in 2023, the demand for gold (excluding over-the-counter investments) fell by 5% compared to 2022, due to reduced central bank buying and fluctuations in ETF investments. Total annual gold supply increased by 3%, driven by a 1% rise in mine production and a 9% increase in recycling, spurred by high gold prices”.

Logo of the World Gold Council
Logo of the World Gold Council
Source: World Gold Council

Who owns the World Gold Council?

The World Gold Council has 32 members that are some of the world’s most forward-thinking gold mining companies. They are headquartered across the world and have mining operations in over 45 countries.

Key roles of the World Gold Council

The World Gold Council organization plays key roles in shaping the global gold market such as market development, market intelligence, advocacy, and policy.

Market Development

Consumer Demand: The WGC works to stimulate consumer demand for gold jewelry, particularly in emerging markets.

Industrial Demand: The WGC highlights the industrial applications of gold, such as its use in electronics and dentistry.

Investment Demand: The organization promotes gold as a long-term investment option, emphasizing its role as a store of value and a hedge against inflation.

According to the World Gold Council website, jewelry remains a significant driver, particularly in markets like China and India, while gold’s industrial uses include electronics and medical devices. In 2023, technology demand for gold dipped slightly, yet it remains a crucial component in the electronics sector.

Market Intelligence

Research and Analysis: The WGC conducts extensive research and analysis on the global gold market, providing insights into trends, supply and demand dynamics, and economic factors affecting gold prices.

Market Data: The organization publishes regular market reports, including the Gold Demand Trends report, which provides detailed information on global gold demand and supply.

WGC invests in research to explore new uses for gold, aiming to increase its demand in areas such as health, environmental technology, and sustainable jewelry.

Advocacy and Policy

Policy Engagement: The WGC engages with policymakers and regulators to promote responsible mining practices and sound gold market policies.

Industry Standards: The organization works to establish and maintain industry standards for gold, ensuring quality and transparency.

Impact of the World Gold Council

Promoting Gold Investment: The WGC has successfully promoted gold as an investment asset, leading to increased demand for gold ETFs and other investment products.

According to WGC website, adding between 4% and 15% in gold to hypothetical average portfolios over the past decade, depending on the composition and the region, would have increased risk-adjusted returns. Along with this information, they also explain every type of possible investment for gold such as Gold-backed ETFs, Gold futures, options and forwards, Internet Investment Gold, Gold savings plans, Investment bars and coins, and Gold certificates.

Supporting Responsible Mining: The organization has been a strong advocate for responsible mining practices, working to improve environmental and social standards in the gold mining industry.

On the WGC website, the Responsible Gold Mining Principles (RGMPs) was launched in 2019 as a framework that sets out clear expectations for consumers, investors, and the gold supply chain as to what constitutes responsible gold mining.

Key Statistics and Trends

Key statistics and trends are useful for finance students which help them understand the global gold market.

Global Gold Demand

Global gold demand has fluctuated over the years, influenced by factors such as economic growth, inflation, and geopolitical events.

The figure below shows the global gold demand in different sectors such as jewelry, technology, ETFs, and similar products dated in 2024 (Q2).

Global gold demand in different sectors in 2024

Source: World Gold Council

Central Bank Gold Reserves

Central banks around the world hold significant gold reserves, which can impact gold prices.

The figure below shows the gold reserves in different countries all over the world dated in 2024 (Q2).

Gold reserves in different countries in 2024

Source: World Gold Council

Gold Investment

Gold ETFs and other investment products have gained popularity in recent years, providing investors with exposure to gold without the need to physically own the metal.

Role of Gold in environmental, social and governance (ESG)

Responsible gold mining supports sustained socio-economic development in the countries and communities where gold is found. It creates well-paid jobs, valuable tax revenues for host governments, and generates sustained benefits for local communities. In recent years, we have seen increased focus from a growing number of consumers and investors on environmental, social, and governance (ESG) factors and the sustainability of our planet.

p>Gold also plays an important role in supporting technologies that enable our daily lives, as well as supporting the transition to a low-carbon economy. There is increasing evidence that including gold can make investment portfolios more robust and resilient in light of climate risks.

In 2019, the World Gold Council launched the Responsible Gold Mining Principles (RGMPs) – a framework that sets out clear expectations for consumers, investors, and the gold supply chain as to what constitutes responsible gold mining. The WGC has long believed that responsible gold mining supports sustained socio-economic development in countries and communities that host gold mining operations, through its contribution to jobs, tax revenue and investment in local communities.

Conclusion

The World Gold Council plays a crucial role in shaping the global gold market. By promoting gold as an investment, industrial, and consumer asset, the WGC contributes to the long-term health and sustainability of the gold industry.

Why should I be interested in this post?

Gold has been a key financial asset for centuries. It is often considered as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. Understanding its investment options helps students grasp fundamental market dynamics and investor behavior, especially during periods of economic uncertainty.

Useful resources

World Gold Council

World gold council Members

World gold council Gold Demand Trends

World gold council Gold Reserves by Country

World gold council Environmental, Social and Governance (ESG)

Other

Wikipedia Gold

About the author

The article was written in November 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Gold and Central banks

December 30, 2024October 29, 2024 by Nithisha CHALLA

Gold and Central banks

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) This article presents a comprehensive understanding of how gold functions within the global economy and central banking strategies, reflecting historical significance, economic impacts, and future potential.

Introduction

Gold’s value as a reserve asset goes beyond its historical significance; today, central banks use it as a vital economic buffer and tool for financial stability. It has played a strategic role in the financial operations of central banks globally, serving as a hedge against inflation, a tool for reserve diversification, and a reliable store of value. This article explores the complex relationship between gold and central banks, highlighting historical significance, reserve strategies, economic impacts, and recent trends.

Historical Significance of Gold and Central banks

Using gold as a currency dates back thousands of years. For much of modern history, gold was the basis of the world’s monetary system, setting the standard for currency value.

Gold Standard

Until the mid-20th century, most major economies adhered to the gold standard, where each currency unit was pegged to a specific amount. Under the Bretton Woods Agreement (1944-1971), the U.S. dollar was directly convertible to gold, while other currencies were pegged to the dollar. This system solidified gold’s role in global monetary stability. However, the Bretton Woods system ended in 1971, transitioning central banks toward a floating exchange rate system.

Shift to Floating Exchange Rates

Although the gold standard was formally abandoned, gold continued to play a central role in monetary reserves for central banks worldwide, driven by its intrinsic value and historic stability in times of financial crisis.

The below figure shows the Top 10 countries with the highest gold reserves (US$ Million) in the second quarter of 2024.

Top 10 countries with highest gold reserves

Source: Central Banks, Federal Reserve Bank of St. Louis, International Monetary Fund, World Bank, World Gold Council

Why Central Banks Hold Gold

Gold is a key asset for central banks due to its stability, independence from other economic assets, and ability to hedge against inflation and currency risk.

Diversification of Foreign Reserves

According to the World Gold Council (WGC), central banks hold gold as part of a diversified portfolio that includes foreign currencies, government bonds, and other assets. Gold’s low correlation with other assets helps reduce portfolio risk.

Inflation Hedge and Safe-Haven Asset

Gold’s value often rises in response to inflationary pressures, making it a popular hedge against currency devaluation. For instance, during periods of heightened inflation in the U.S. and Europe, central banks increased their gold reserves to stabilize national reserves.

Global Stability During Crises

Central banks increase gold holdings during geopolitical tensions and economic downturns. For instance, central banks acquired approximately 1,136 metric tons of gold in 2022 alone, marking the largest annual net gold purchases since 1967 (World Gold Council, 2023).

Leading Central Banks and Their Gold Holdings

Many countries prioritize gold in their reserve strategies, with the largest gold holdings concentrated among a few central banks. These top holders collectively hold around 60% of global central bank gold reserves, underscoring gold’s importance among the world’s most prominent economies.

United States: The U.S. has the largest gold reserves, totaling 8,133.5 metric tons as of 2023 (World Gold Council). The U.S. Federal Reserve’s substantial gold reserves bolster the dollar’s stability, lending it a “safe-haven” currency status.
Germany: The Deutsche Bundesbank holds around 3,355 metric tons of gold, focusing on economic stability and currency confidence.
International Reserves: The International Monetary Fund (IMF) holds around 2,814 metric tons of gold, which it maintains as a “safety net” for international economic stability, intervening to support currency values in times of economic crisis.

Emerging Markets and Rising Demand for Gold Reserves

In recent years, emerging economies have increasingly turned to gold to reinforce their economic stability.

China: As stated by the People’s Bank of China (PBoC), its gold reserves have rapidly expanded to approximately 2,010 metric tons as of 2023, part of China’s strategy to reduce dependence on the U.S. dollar and enhance the yuan’s position as a global currency.
Russia: The Central Bank of Russia actively grew its gold reserves to over 2,298 metric tons by 2022 (World Gold Council), emphasizing the importance of gold amid geopolitical tensions and economic sanctions.
India: The Reserve Bank of India (RBI) also expanded its gold holdings, reaching approximately 795 tons in 2023. India uses gold as a hedge against currency volatility, particularly during inflationary cycles, aligning with its long-standing cultural and economic relationship with gold (World Gold Council, 2023).

Economic Impacts of Central Bank Gold Purchases

The actions of central banks significantly influence global gold markets, particularly in times of economic instability.

Price Stability and Market Demand: Central banks collectively account for about 10-20% of annual global gold demand, influencing gold prices and market stability. According to the World Gold Council, central bank purchases accounted for a record-breaking 1,136 metric tons in 2022, pushing global gold prices to multi-year highs.

Strengthening Currency Value: For many emerging markets, holding gold as a reserve asset bolsters currency credibility. Gold reserves help stabilize a nation’s economy by maintaining foreign reserves and serving as a collateralized asset during debt restructuring or financial assistance negotiations.

Inflation Control: Countries with high inflation rates, such as Turkey, have increased their gold reserves to combat domestic inflationary pressures. By 2023, Turkey’s central bank held around 550 tons of gold, partially insulating its economy from severe currency depreciation.

The Future of Gold in Central Bank Reserves

Shift from the Dollar-Centric System

Some central banks, especially in emerging markets, aim to diversify away from the dollar and other Western assets, driven by geopolitical concerns. Gold provides an attractive alternative due to its universal value and liquidity.

Increased Demand for Sustainable Financial Assets

Gold mining and sustainability are increasingly critical issues for central banks. Many central banks, led by European nations, have begun to prioritize sustainably sourced gold for their reserves, aligning with ESG (Environmental, Social, and Governance) commitments.

Potential for Digital Gold Reserves

As digital currencies evolve, some central banks are exploring digital gold or gold-backed digital currencies as potential financial assets. This shift could create new financial instruments, making gold an even more versatile and accessible asset class.

Conclusion

Gold remains a critical element of central bank reserves, valued for its stability, economic security, and inflation-hedging properties. With global gold demand on the rise, central banks are likely to continue viewing gold as an essential reserve asset. As emerging economies strengthen their reserves and geopolitical risks persist, gold’s importance within central banking strategies will only deepen, securing its status as a pillar of global economic stability.

Why should I be interested in this post?

Gold has been a key financial asset for centuries, acting as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. With both developed and emerging economies increasing their gold reserves, understanding its role as a financial cornerstone for central banks helps students grasp fundamental market dynamics and investor behavior, especially during periods of economic uncertainty

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Bogle, John C. (2007). The Little Book of Common Sense Investing. John Wiley & Sons.

Business

World Gold Council (WGC) Gold Demand Trends Full Year 2023

Federal Reserve System What central bank does?

Mining.com (August 7, 2024) China’s PBOC keeps gold buying on hold as prices hit record

International Monetary Fund (IMF) The role of gold

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Gold in India

December 30, 2024October 29, 2024 by Nithisha CHALLA

Gold in India

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explores gold’s multifaceted significance in India, examining its historical roots, economic impact, cultural value, and future potential.

Introduction

India’s association with gold is ancient, with the metal symbolizing prosperity, purity, and wealth. For centuries, gold has been valued as an adornment and a symbol of security and status, affecting both urban and rural economies across the country. With India and China together accounting for over 50 percent of the world’s gold demand, World Gold Council dated October 2024, understanding its importance goes beyond investment; it’s a story of tradition, economic significance, and national pride. As one of the world’s top gold importers, India’s reliance on imported gold introduces opportunities and challenges for its economy.

Historical Significance of Gold in India

This refers to the ancient history, religious and cultural ties, historical trade, and treasure of gold.

Ancient History

India’s relationship with gold dates back to the Indus Valley Civilization (circa 3300–1300 BC), where archeological finds have unearthed gold jewelry, indicating the metal’s early status as a precious material. India was a central hub in ancient trade, exchanging spices, textiles, and precious metals. Gold was both imported and exported, flowing from regions like Persia and Egypt, as traders recognized India as a rich market. This trade bolstered India’s gold reserves and established the metal as a key part of economic and social transactions.

Below figure shows a photograph of a group of goldsmiths (Sonars) seated around a low work table in Bombay, taken by Shivashanker Narayen in c. 1873, from the Archaeological Survey of India Collections.

Photograph of a group of goldsmiths in 1873

Source: shoplune

Religious and Cultural Ties

Gold holds divine significance in Hindu mythology. According to legend, the Hindu goddess Lakshmi, the deity of wealth and prosperity, is adorned in gold, symbolizing abundance. This association with divinity makes gold not only valuable but auspicious, embodying good fortune and blessings. Gold has sacred connotations, used extensively in temples, idols, and as offerings to deities. Temples like Tirupati and Padmanabhaswamy house enormous gold reserves, signifying the metal’s spiritual importance.

Below figure shows a picture of the Hindu god Sri Padmanabhaswamy reclining on the serpent Anantha which is one of the golden treasures of India

Sri Padmanabhaswamy reclining on the serpent Anantha

Source: Forbes

Cultural and Social Importance of Gold

In many regions, particularly in rural India, gold represents financial stability. It is often considered a “safe asset” that can be sold or pledged in times of need. It is a staple in Indian weddings and festivals like Diwali and Akshaya Tritiya, where it symbolizes luck and prosperity. Families across income levels save and invest in gold, especially for daughters’ weddings.

According to the World Gold Council (WGC), Indian households hold approximately 25,000 metric tons of gold, accounting for nearly 40% of global private gold holdings in the world. Gifting gold remains a widespread tradition in India, passed down through generations as family heirlooms and regarded as wealth that grows with time. WGC expects the average demand to reach around 850 to 950 tonnes per annum by 2020 at an annual growth rate of 35 percent with two-thirds of its market coming from rural markets, that is households.

Because of the emotional value associated with household jewelry, people rarely sell their gold to meet their immediate financial needs, as an alternative people pledge their gold ornaments as short-term loans, such loans are called organized gold loan markets.

Below figure shows, an organized gold loan market projection(as mentioned above), INR 3101 billion by 2020 at a three-year CAGR of 13.17 percent

Gold loan market projection

Source: KPMG

Economic Impact of Gold in India

India’s gold consumption significantly affects its economy, with implications for trade, financial stability, and national savings.

Gold as a Financial Asset, Trade Balance and Foreign Exchange

Inflation Hedge: Gold is traditionally seen as a hedge against inflation, protecting wealth during economic downturns. Its ability to retain value attracts investors during periods of high inflation or currency devaluation. For a rigorous analysis of this question, you can read the academic articles by Erb and Harvey (2013 and 2024) that challenge the traditional view that gold is a hedge against inflation.

Risk Diversification: Investors across India use gold to diversify their portfolios, as gold prices often perform inversely to equity markets. This reduces risk, providing a balance during times of market volatility.

High Import Dependency: India imports over 80% of its gold, making gold purchases a significant contributor to the trade deficit. In 2021, gold imports cost the Indian economy around $55 billion, placing substantial pressure on the country’s current account.

Import Duty Adjustments: To counter rising imports, the government levies an import duty on gold (currently, in 2024, around 6%), aiming to curb demand and balance the trade deficit. However, this often leads to price-sensitive demand fluctuations.

During the July 2024 Union Budget, Finance Minister Nirmala Sitharaman announced a drop in customs duties on the import of gold, silver and platinum. Due to this, the current duties drop from 15% to 6%, a significant cut of 9% in import duty on gold.

Below figure shows, import customs duty on gold, from 15 percent in July 2022, to 6 percent in July 2024.

Gold customs import duty

Source: World Gold Council (WGC)

Contribution to the Indian Economy Through Employment and Taxes

Employment in Jewelry and Trade: India’s gold industry employs millions, from miners and artisans to retail jewelers. Major gold hubs like Mumbai and Jaipur have vibrant trade networks, supporting local economies and artisan crafts. The Federation of Indian Chambers of Commerce & Industry (FICCI) and the World Gold Council (WGC) (September 2022), report that the gold industry contributes over $30 billion to India’s GDP annually, with the jewelry sector alone employing around 4.6 million people, spanning from goldsmiths to retail traders and related support sectors.

Tax Revenue: The gold industry is a source of government revenue through import duties, GST on gold purchases, and income tax from jewelers and traders.

Shift Toward Formal Investments: Younger and urban investors are increasingly investing in structured products like Sovereign Gold Bonds and Gold ETFs, signaling a gradual shift from physical gold to formal investment avenues.

Gold’s Impact on Financial Policies and Regulations

Policy on Import and Consumption: India’s government frequently adjusts gold import policies to control demand and influence economic stability. High demand often prompts higher import duties or restrictions to limit the impact on foreign exchange.

Regulation of Financial Gold Products: To support formal financial growth, the government offers options like Sovereign Gold Bonds, which promote investment without affecting the trade balance. These bonds allow investors to gain from gold’s price appreciation without physical ownership.

Anti-Smuggling Efforts: Due to high import duties, gold smuggling has become an issue. Regulatory efforts focus on reducing smuggling to ensure that the government earns tax revenue from gold imports.

Gold’s Role in Modern India

Gold in Indian Independence

During India’s independence movement, 1857-1947, leaders urged citizens to donate gold for the national cause. This movement emphasized gold’s role as a unifying asset for Indians across social classes.

Continuing Cultural Significance in Post-Independence India

The importance of gold has persisted in modern India, with a large part of household wealth still held in physical gold. Even as digital and financial assets grow, gold remains a stable and respected form of wealth storage.

Evolution with Government Policies

Post-independence, gold import policies, and the introduction of schemes like the Gold Monetization Scheme and Sovereign Gold Bonds have attempted to modernize India’s relationship with gold, encouraging citizens to treat it as an investment rather than simply a family heirloom.

Gold Markets and Demand in India

Based on the data given by Statista, the demand for gold across India was about 747.5 metric tons in 2023. This represented a decrease of three percent in comparison to the previous year, when the gold demand was 774 metric tons.

Below figure shows fluctuations in the annual demand volume of gold across India from 2010 to 2023.

Annual gold demand volume from 2010 to 2013

Source: Statista

Regional Gold Hubs: Cities like Mumbai, Kolkata, and Chennai have bustling gold markets, with jewelry demand highest in Tamil Nadu, Kerala, and Maharashtra.
Jewelry vs. Investment Demand: While traditional gold jewelry demand remains high, investment in gold bars, coins, and newer avenues like digital gold is rising.
Gold Price Sensitivity: Indian consumers are sensitive to gold price fluctuations, with demand typically increasing during periods of price stability or decline.

Conclusion

Gold remains the top choice for many investors for portfolio diversification or protection against economic instability. This precious metal has held its value over centuries. While market prices fluctuate, many still choose to buy gold to secure their financial future.

Why should I be interested in this post?

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Bogle, John C. (2007). The Little Book of Common Sense Investing. John Wiley & Sons.

Business

World Gold Council (WGC) India’s gold jewellery market structure

World Gold Council (WGC) Indian gold import duties reduced to the lowest level in over a decade

KPMG (2017) India’s gold loan market: Is it glitter fading?

Shoplune The Story Of India And Gold Through The Ages

Statista Annual demand volume of gold across India from 2010 to 2023

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

How to invest in Gold

December 30, 2024October 17, 2024 by Nithisha CHALLA

How to invest in Gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) provides an overview of types of gold investments, strategies and considerations that follows.

Introduction

There is a saying from ancient times: “There is no better way to increase and preserve your buying power than through ownership of gold and silver”. It could defer from country to country, but gold remains a preferred investment in contemporary financial markets. In this article, we delve a little deeper into types of gold investments such as physical gold investments, gold certificates, mutual funds, alternative gold investments, and investment strategies and considerations.

Physical Gold Investments

This refers to purchasing physical gold through bars, coins, and jewelry.

Bullion (Bars and Coins)

Bullion refers to purchasing physical gold in the form of bars or coins. The value is directly linked to the gold price, but it comes with storage and insurance costs. Popular among collectors and investors, gold coins like the American Eagle and Canadian Maple Leaf are often considered for their liquidity and ease of trade.

Gold Bullion: coins and bars
Gold bullion and coins
Source: US Gold Bureau

Advantages and disadvantages: It is a tangible asset that has no counterparty risk and possesses universally recognized value, but it has high storage costs, insurance and liquidity issues. Larger gold bars are generally more liquid than coins, as they are easier to sell and can be divided into smaller units if needed. Whereas, some coins, especially those with limited mintage (how many were made in the first place), may be less liquid and harder to sell. Current Gold Price as of October 17, 2024, is approximately $1,950 per ounce (USD).

Jewelry

Jewelry refers to purchasing physical gold in the form of ornaments. Most of the countries like China, India, Egypt, etc. have high cultural significance and resale value for these ornaments. Several ancient ornaments are passed on to their heirs in kingdoms that hold high value.

Gold Jewelry

Source: US Gold Bureau

Advantages and disadvantages:Jewelry is valued on its purity, craftsmanship, and market trends, but it has high wastage, and making charges. In countries like India, the wastage and making charges of gold depending on the complexity of the jewelry design could almost cost an extra one-third of the actual gold value in the ornament.

Gold Certificates

Starting in the 17th century, gold certificates were issued by goldsmiths in London and Amsterdam. These gold certificates then acted as proof of gold ownership. In time, the certificates were passed from hand to hand just like cash payments, without the hassle of having to move the gold bullion itself. In early 19th-century, US Treasury began to issue gold certificates which circulated as money until 1933, when the US government banned private gold ownership inside the United States. Today, gold certificates continue to be issued by several German and Swiss banks, as well as by gold pool programs in Australia and the US. These certificates represent ownership of a certain quantity of gold bullion or coins.

Gold Certificates
Gold Certificates width=
Source: Wikipedia

Advantages and disadvantages: Though it avoids physical storage issues and provides easy transferability, there was high counterparty risk and a lack of physical possession.

Paper Gold Investments

Gold Exchange Traded Funds (ETFs)

These funds allow investors to gain exposure to the gold price without owning the physical asset. ETFs like SPDR Gold Shares (GLD) track the gold price closely and are popular among institutional and retail investors.

Advantages and disadvantages: The main advantages of ETF’s are their ease of trading, Liquidity, and lower transaction costs. And the disadvantages are its high management fees and potential tracking errors. Added reference at the end of the article.

Several case studies examining the performance of SPDR Gold Shares (GLD) during economic downturns typically analyze how this gold-backed ETF tends to perform when broader stock markets experience significant declines, highlighting its potential as a “safe haven” asset where investors often flock to preserve wealth during times of uncertainty; this study would likely show that GLD prices often rise or remain relatively stable during economic downturns, demonstrating gold’s historical role as a hedge against market volatility.

Gold Mining Stocks

Gold stocks are shares of companies involved in the gold industry, either a mining corporation, gold Mutual Funds, or Exchange Traded Funds. It means that you own a certain part of the company, and you are entitled to any profit or loss that comes out of your investment in the gold stocks. The ETF’s here are called gold mining ETF’s and an example is VanEck Vectors Gold Miners ETF (GDX).

Advantages and disadvantages: Gold mining stocks can provide significant leverage to gold price movements. A small increase in gold prices can translate into a larger gain for the mining company’s stock.

Gold Mutual Funds

A “gold mutual fund” is a pooled investment that buys a variety of gold mining stocks, allowing you to indirectly gain exposure to the gold mining industry with less individual company risk; essentially, a gold mutual fund is a basket of gold mining stocks managed by a professional fund manager.

Advantages and disadvantages: Though it benefits from professional management and diversification, it has higher fees compared to ETFs, and less direct exposure to gold prices.

Alternative Gold Investments

Gold Futures and Options: Derivative contracts based on future gold prices. It has high volatility and, the potential for significant losses.
Gold IRAs: Individual Retirement Accounts that include physical gold. It has high tax advantages, and portfolio diversification but also has high custodial fees and storage requirements.
Digital Gold: Investing in gold through digital platforms that represent ownership of physical gold. It has high risks in platform reliability and cybersecurity concerns.

General Terminology in Gold Investments

Diversification: How gold can balance a diversified investment portfolio.

Hedging Against Inflation: Gold’s role in protecting against currency devaluation and inflation.

Market Timing: Strategies for buying low and selling high, technical and fundamental analysis.

Risk Management: Setting investment goals, understanding volatility, and managing exposure.

Conclusion

Why should I be interested in this post?

Useful resources

Academic research

Bogle, John C. (2007). The Little Book of Common Sense Investing. John Wiley & Sons.

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Business

World Gold Council Gold spot prices

Bloomberg Investing in Gold: Is Gold Still a Good Inflation Hedge in a Recession?

Focus economics Gold: The Most Precious of Metals

Gold Avenue What is a gold ETF?

Seeking Alpha GLD: Why Gold Should Be Your First Portfolio Pick In A Recession

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

The Price of Gold

December 30, 2024October 17, 2024 by Nithisha CHALLA

The Price of Gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explores the complexities behind gold pricing, key external drivers, and historical trends.

Introduction

Gold has been a store of value and medium of exchange for centuries, its price deeply rooted in global economic, political, and financial systems. In modern markets, the price of gold is influenced by a range of factors, from macroeconomic conditions to geopolitical tensions.

What Is the Gold Price?

The gold price is the market value of one troy ounce of gold. It is quoted in terms of various currencies, most notably the U.S. dollar (USD). The price fluctuates based on supply and demand dynamics in international markets, and gold is traded on commodity exchanges such as the London Bullion Market Association (LBMA) and COMEX in the United States.

When studying gold price there are two terms we certainly come across, they are Spot Price and Futures Price. Spot Price is the current market price at which gold can be bought or sold for immediate delivery. The futures price is the agreed-upon price for gold to be delivered at a future date, which can differ from the spot price due to expectations of future market conditions.

Figure 1 below gives the evolution of the gold price over the period January 1971-September 2024.

Figure 1. Evolution of the Gold price
Gold price chart January 1971-September 2020
Source: Wikipedia

Key factors affecting gold price

Supply and demand dynamics

The fundamental economic principle of supply and demand plays a crucial role in determining the price of gold. However, unlike consumable commodities, the supply of gold remains relatively stable since most of the gold ever mined is still in existence.

Global gold production:
New gold production, primarily from mining, adds a limited amount to the existing gold supply. Countries like China, Australia, and Russia are major gold producers, and changes in production levels can impact prices.
Jewelry and industrial demand:
Jewelry accounts for a significant portion of global gold demand, particularly in countries like India and China. In addition, gold has applications in technology, particularly in electronics and medical devices.
Economic Conditions:
During economic prosperity, people may be more inclined to purchase gold jewelry for personal adornment or as a status symbol. However, during economic downturns, demand for jewelry may decline.
Central Banks:
Central banks can significantly impact gold prices by buying or selling gold reserves. Their actions can influence market sentiment and prices.
Technology:
Gold is used in various industries, including electronics, dentistry, and aerospace. Advancements in technology can drive demand for gold in these sectors.

Inflation and gold as a hedge

Gold is traditionally seen as a hedge against inflation. When inflation rises, the purchasing power of fiat currencies decreases, leading investors to seek refuge in assets like gold, which tend to maintain value over time. During periods of high inflation, such as the 1970s, gold prices surged as investors sought protection against currency devaluation.

Erb and Harvey (2013) observed that a common argument for investing in gold is that it is an inflation hedge, a golden constant. The golden constant can be considered as a collection of statements that assert that over a long time, the purchasing power of gold remains largely the same; in the long run, inflation is a fundamental driver of the price of gold; deviations in the nominal price of gold relative to its inflation-adjusted price will be corrected; and in the long run, the real return from owning gold is zero.

Interest rates and opportunity cost

There is a strong inverse relationship between gold prices and interest rates. When interest rates are low, the opportunity cost of holding non-yielding assets like gold decreases, making gold more attractive to investors. The period of low interest rates following the 2008 financial crisis led to a sharp increase in gold prices as central banks worldwide implemented loose monetary policies.

U.S. dollar strength

Gold is priced in U.S. dollars, so fluctuations in the value of the dollar have a direct impact on gold prices. When the U.S. dollar strengthens, gold becomes more expensive for foreign buyers, potentially reducing demand and lowering prices. In 2014, the strengthening of the U.S. dollar against other major currencies contributed to a decline in gold prices.

Figure 2 below gives the evolution of the gold price against the US dollar.

Gold price vs US dollar

Source: Bloomberg

Central bank policies

Central banks around the world hold substantial gold reserves, and their buying or selling behavior can influence gold prices. In recent years, central banks, particularly in emerging markets, have increased their gold holdings to diversify reserves away from fiat currencies like the U.S. dollar. Russia and China have been among the largest buyers of gold in recent years, which has helped support the price of gold.

Gold as a hedge against global financial crises

The role of gold in times of crisis: Gold is widely regarded as a hedge during financial crises. Investors tend to flock to gold during periods of extreme volatility in stock markets or global currency markets. The COVID-19 pandemic is the most recent example, where gold rallied to record highs as economies around the world faced unprecedented challenges. During the 2008 financial crisis, gold prices surged as investors sought alternatives to failing banking institutions and depreciating fiat currencies.
Currency devaluation and hyperinflation: In countries facing hyperinflation or severe currency devaluation, such as Venezuela or Zimbabwe, gold has acted as a critical asset to preserve wealth. When a nation’s currency rapidly loses value, gold remains a valuable and stable store of wealth

Gold price and its relationship with other assets

Gold vs stock market

Gold often moves inversely to the stock market. During periods of stock market decline or volatility, investors tend to move funds into gold, leading to price increases. However, in bull markets, gold may lag as investors seek higher returns in equities. For example, during the 2008 financial crisis, while global stock markets crashed, gold prices surged as it became a safe-haven asset.

Gold vs bonds

There is a similar inverse relationship between gold and bond yields, especially U.S. Treasury yields. When bond yields are low, the opportunity cost of holding gold decreases, making it more attractive. Conversely, rising bond yields can lead to lower demand for gold as bonds offer better returns.

Gold vs. cryptocurrencies

The rise of cryptocurrencies like Bitcoin has sparked debate about whether these digital assets could replace gold as a store of value. Although both assets are seen as alternatives to fiat currency, gold has a longer history and is less volatile. Cryptocurrencies offer higher potential for speculative gains, but their price volatility makes gold the preferred haven during financial crises.

The Future of gold prices

Increasing Central Bank Demand: Central banks, particularly in emerging markets, are expected to continue increasing their gold reserves, further supporting demand and prices.

The rise of digital assets such as Bitcoin has led to debates about whether cryptocurrencies could replace gold as a store of value. While some investors are shifting toward crypto, gold remains a trusted asset with thousands of years of history backing its status as a safe haven

Conclusion

The gold price is a reflection of a wide array of global economic and political factors, from inflation and central bank policies to geopolitical risks and financial market stability. While gold’s role as a hedge against inflation and a safe-haven asset remains unchanged, its interactions with modern financial markets, including competition from digital assets like cryptocurrencies, continue to evolve. Investors and central banks alike look to gold as a reliable store of value, particularly in times of uncertainty.

Why should I be interested in this post?

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Business resources

World Gold Council Gold spot prices

Bloomberg Investing in Gold: Is Gold Still a Good Inflation Hedge in a Recession?

Focus economics Gold: The Most Precious of Metals

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

ETFs on gold

December 30, 2024October 11, 2024 by Nithisha CHALLA

ETFs on gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) provides an overview of ETFs on gold, the major types gold ETFs in market, and the advantages and disadvantages of investing on gold ETFs.

Introduction

Gold ETFs are financial instruments that track the price of gold and allow investors to buy shares representing a fraction of physical gold holdings. The first gold ETF was launched in March 2003. Later, State Street Corporation launched SPDR Gold Shares (NYSE: GLD) in 2004, which became the largest gold-backed ETF in the world by 2019. In 2020, the Royal Mint issued the first gold ETC issued by HANetf Securities Plc, from a European sovereign entity. And after that, Wilshire Phoenix launched the wShares Enhanced Gold Trust (NYSE: WGLD) in 2021. This ETF tracks the Wilshire Gold Index, which automatically rebalances physical gold and cash based on market conditions.

Types of Gold ETFs

There are two types of gold ETFs, namely Physically Backed Gold ETFs and Synthetic gold ETF’s.

Physically Backed Gold ETFs: These ETFs invest in physical gold, held in a secure vault by the ETF provider. The units of the ETF represent a specific amount of gold. For example, one unit of a physically backed gold ETF might represent 1 gram of gold. Examples include SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).

Synthetic Gold ETFs: These ETFs do not invest in physical gold. Instead, they use financial instruments, such as futures contracts or swaps, to track the price of gold. This means the ETF provider does not need to hold any physical gold.

Major Gold ETFs in the Market

SPDR Gold Shares (GLD)

SPDR offers investors an innovative, relatively cost-efficient, and secure way to access the gold market. Originally listed on the New York Stock Exchange in November of 2004, and traded on NYSE Arca (the top U.S. exchange for the listing and trading of exchange-traded funds (ETFs) ) since December 13, 2007, SPDR Gold Shares is the largest physically backed gold exchange-traded fund (ETF) in the world. SPDR Gold Shares also trade on the Singapore Stock Exchange, the Tokyo Stock Exchange, The Stock Exchange of Hong Kong, and the Mexican Stock Exchange (BMV).

Figure 1 below gives GLD share price dated from January 1, 2024, to October 11, 2024.

Figure 1. SPDR share price

Source: Yahoo Finance

iShares Gold Trust (IAU)

With a global lineup of 1,400+ Exchange Traded Funds (ETFs), iShares has been a leader in the ETF marketplace for more than two decades, and as a part of BlackRock, their products are engineered by investment professionals with discipline and deep risk management expertise. It has a lower expense ratio (It is the fee that investors pay to own a mutual fund or exchange-traded fund (ETF)) compared to GLD.

Figure 2 below gives the IAU share price dated from January 1, 2024, to October 11, 2024.

Figure 2. SiShares Gold Trust (IAU) share price

Source: Yahoo Finance

Aberdeen Standard Physical Gold Shares ETF (SGOL)

SGOL is designed to track the spot price of gold bullion by holding gold bars in a secure vault in Switzerland. The company also posts the serial numbers of the bars, giving investors further security over the status of their investment. While SGOL isn’t the most liquid way to gain exposure to gold, it could be a solid choice for investors seeking greater peace of mind regarding their precious metals investment.

Now how do we trust the data here? To maintain the authenticity of the gold ETF’s the data is monitored in three ways, independent audits, periodic physical verifications or regulatory oversights. By ensuring the accuracy of the fund’s financial reporting and the security of its gold holdings, audits help to protect investors from fraud, mismanagement, and other risks. For example, SGOL is Audited twice a year.

Figure 3. Aberdeen Standard Physical Gold Shares ETF (SGOL) share price

Source: Yahoo Finance

Comparative Analysis of Gold ETFs

Gold ETFs provide a convenient way to invest in gold without the need to physically own it. They offer benefits like easy trading, lower costs, and the ability to diversify your portfolio. However, not all gold ETFs are created equal. Here’s a comparative analysis of key factors to consider when choosing a gold ETF:

Expense Ratios: The annual fee charged to manage the ETF. A lower expense ratio means more of your investment goes towards buying gold, rather than paying fees. Compare the expense ratios of different gold ETFs to find one with the lowest cost.
Liquidity and Trading Volume: The ease with which an ETF can be bought or sold at a fair price. High liquidity means you can buy or sell shares quickly without significantly affecting the price. Look for ETFs with high trading volumes to ensure liquidity.
Tracking Accuracy: The difference between an ETF’s performance and the performance of its underlying benchmark (usually the spot gold price). A lower tracking error indicates the ETF is more closely following the gold price.
Tax Considerations: How efficiently an ETF is taxed, Tax-efficient ETFs can help you minimize your tax burden. So researching the tax implications of different gold ETFs to find one that aligns with your tax strategy is highly beneficial.

The annual management fees are different for different ETFs, which is also a key factor for the investors to choose a certain ETF to invest in. For example, SPDR Gold Shares and iShares Gold Trust charge 0.25%, Invesco Gold ETF charge 0.15% and WisdomTree Physical Gold ETF charge 0.20%.

Advantages and disadvantages of Investing in Gold ETFs

Whether the advantages or disadvantages outweigh each other depends on your circumstances and investment goals.

Advantages of Investing in Gold ETFs

High liquidity: Gold ETFs are easily tradable on stock exchanges, providing investors with quick entry and exit options. They offer a convenient way to invest in gold without the need to physically store or transport the metal.

Low costs: Investors don’t need to worry about storage and security issues associated with physical gold. Additionally, the expense ratios are generally lower than mutual funds.

Diversification: Investing in gold ETFs offers a way to diversify portfolios with exposure to gold prices, often serving as a hedge against inflation and market volatility.

Disadvantages and Risks of Gold ETFs

Counterparty Risk: If the issuer of the ETF becomes insolvent, investors may face losses.

Taxes: Capital gains taxes may apply when you sell your ETF shares.

Volatility: The price of gold can be highly volatile, and gold ETFs are no exception. Investors should be prepared for potential price fluctuations.

Storage: While gold ETFs typically store their gold in secure vaults, there’s always a risk of theft or loss.

Considerations for gold investment strategies

In the end, the best investment strategy for you will depend on your circumstances and risk tolerance. By carefully considering these factors and the potential benefits and risks associated with gold ETFs, you can make informed decisions about how to incorporate them into your investment portfolio.

Portfolio diversification: A common strategy is to add gold ETFs to your investment portfolio for diversification. Gold’s price movements often correlate negatively with stocks and bonds, providing a potential haven during market downturns. By including gold in your portfolio, you can reduce overall risk and potentially improve returns over the long term.

Hedging Against Inflation: One popular strategy is to use gold ETFs as a hedge against inflation, as gold prices tend to rise when inflation is high. This can help protect your portfolio from the eroding purchasing power of your currency. Note that academic studies (see Erb and Harvey, 2013) have shown that gold may not be a good hedge against inflation.

Conclusion

Gold remains the top choice for many investors for portfolio diversification or protection against economic instability. This precious metal has held (more or less) its value over centuries. While market prices fluctuate, many still choose to buy gold to secure their financial future.

Why should I be interested in this post?

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42. Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma Working paper.

Business

Gold Avenue What is a gold ETF?

SPDR Gold shares Bringing the gold market to investors

iShares gold trust (IAU) Why IAU?

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Gold mines and their story

December 30, 2024September 15, 2024 by Nithisha CHALLA

Gold mines and their story

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents financial and economic characteristics of significant gold mines, including case studies of the most popular, scandalous, and largest gold mines.

Introduction

The history of gold mining can be traced back to prehistoric times, with the world’s oldest known underground mine being over 40,000 years old. Their history has a lot to offer to understand today’s financial and economic influence countries could have by gold. Undoubtedly being one of the biggest industries in the market, “Gold mining” has its fair share of politics involved in it. In this article, we start with discussing modern gold mining techniques and delve a little more into the economic powerhouses (most popular mines), the titans (largest gold mines in the world), and the notable news in the history of gold mines.

Modern Gold Mining Techniques

Long before any gold can be extracted, significant exploration and development need to take place, both to determine, as accurately as possible, the size of the mineral deposit, as well as how to extract and process the ore efficiently, safely, and responsibly. It can typically take between 10 and 20 years after a deposit is discovered before a gold mine is ready to produce material that can be refined into bullion.

As mentioned above there are several methods to mine minerals from the ground often depending on the environmental, and economical situations of the mine.

Open-Pit Mining: This method involves excavating large areas to access ore bodies near the surface. It’s common in large-scale mining operations but has significant environmental impacts.
Underground Mining: Used when ore bodies are deep beneath the surface. It’s more expensive and labor-intensive but less disruptive to the surface environment.
Cyanidation Process: A common method for extracting gold from ore, it involves dissolving gold in a cyanide solution. While efficient, it poses environmental risks due to potential cyanide spills.
Artisanal and Small-Scale Mining (ASM): In many developing countries, ASM provides livelihoods for millions. However, it’s often associated with poor working conditions and environmental degradation.

Famous Gold Mines

These are gold mines that have gained significant recognition and influence due to their historical importance, production levels, or economic impact. Popularity in this context is not solely about size but also about the mine’s role in shaping the gold industry, its impact on regional or global economies, and its notoriety in the public or financial sphere.

South Africa – The Witwatersrand Basin: This region has produced more than half of the world’s gold. The discovery in 1886 led to the establishment of Johannesburg and was central to South Africa’s economy.
United States – The California Gold Rush: The 1848 discovery at Sutter’s Mill sparked the California Gold Rush, leading to significant migration and economic development in the western U.S.
Australia – The Super Pit: Located in Kalgoorlie, the Super Pit is one of the largest open-pit gold mines in the world and a significant contributor to Australia’s gold production.
Peru – Yanacocha Mine: As one of the largest gold mines in the world, Yanacocha has been both an economic boon and a source of environmental controversy.

The Witwatersrand Basin (South Africa)

The Witwatersrand Basin has been the world’s most productive goldfield since its discovery in 1886. It has produced over 40% of all the gold ever mined. The Basin’s gold wealth transformed South Africa’s economy, turning Johannesburg into a major financial hub and leading to the establishment of companies like Anglo American and Gold Fields.

The gold from the Witwatersrand fueled the economic development of South Africa, contributing significantly to GDP, foreign exchange reserves, and employment. The mining companies involved became some of the largest in the world, with Anglo American, in particular, playing a crucial role in global finance.

Witwatersrand Basin mine
Witwatersrand Basin mine layout
Source: Wikipedia

Case study: The diamond tycoons – The so-called Randlords, a group of mining magnates like Cecil Rhodes and Barney Barnato, amassed enormous fortunes from the Witwatersrand mines. Their influence extended beyond mining into global finance, politics, and the diamond industry, showcasing the far-reaching economic impact of gold mining in this region. Of necessity, a large workforce had to be recruited. “The South African gold mining industry in 1980 alone employed 472 000 workers, 44 000 of whom were white and 428 000 black,” notes Prof Mark Pieth, president of the Basel Institute on Governance.

The Carlin Trend (Nevada, USA)

Discovered in 1965, the Carlin Trend is one of the richest gold mining districts in the world. It accounts for over 5% of total world production, with more than 84 million ounces of gold extracted. The area is home to some of the largest gold mines in the U.S., operated by companies like Barrick Gold and Newmont Corporation.

The Carlin Trend has made Nevada one of the leading gold-producing regions globally, contributing significantly to the U.S. economy. The state benefits from mining royalties, taxes, and job creation. Barrick and Newmont’s operations have provided stable revenue streams, even during periods of economic volatility, underscoring gold’s role as a financial anchor.

A case study dated on 5th February 2021, states that in 2005, the company operated 13 open pits, four underground mines and 14 active processing facilities in Nevada. Most, including Leeville (where development ore production started in Q3 2005, totaling 16,000 oz by the year-end), are located on the Carlin Trend west of Elko, exploiting the unique mineralization identified by Newmont in 1964.

The Carlin Trend layout

Source: Street wise reports

The Biggest Gold Mines: Titans of the Industry

These mines are defined by their sheer size, particularly in terms of gold reserves and annual production capacity. The “largest” designation typically refers to the physical quantity of gold that can be mined or the volume of gold already produced.

Grasberg Mine (Indonesia): The Grasberg Mine in Papua, Indonesia, is the largest gold mine in the world in terms of reserves. Operated by Freeport-McMoRan, it has produced over 30 million ounces of gold since operations began in 1972. The mine is also rich in copper, making it a key asset in the global mining industry.

Muruntau Mine (Uzbekistan): The Muruntau Mine in Uzbekistan is one of the largest open-pit gold mines in the world, with estimated reserves of over 170 million ounces. The mine has been in operation since the 1960s and continues to be a cornerstone of Uzbekistan’s economy. The state-owned Navoi Mining & Metallurgy Combinat (NMMC) operates the mine, and its profits play a vital role in funding national development projects.

South deep mine (South Africa): South Deep, owned by Gold Fields, is one of the world’s largest gold mines by reserves. Located in the Witwatersrand Basin, it contains an estimated 81.4 million ounces of gold. The mine’s depth and complex geology make it one of the most challenging to operate, but its vast reserves promise long-term production. The mine’s profitability is highly sensitive to gold prices, and the company has implemented various cost-cutting measures to improve financial performance. The mine also plays a key role in South Africa’s economy, providing jobs and contributing to GDP.

Economic and financial challenges in gold mining:

Operating costs and profit margins:

The profitability of gold mines is closely tied to operating costs, which include labor, energy, and equipment expenses. Mines with high All-In Sustaining Costs (AISC) are more vulnerable to fluctuations in gold prices, while those with lower costs can generate profits even during downturns.

For example, the AISC at South Deep in South Africa has historically been high, affecting profitability, while mines like Newmont’s Boddington in Australia have lower AISC, contributing to stronger financial performance.

Gold Price Volatility and Market Risks:

Gold price volatility poses significant risks for mining companies. Sharp declines in gold prices can lead to reduced revenues, making it difficult to finance operations and capital projects. Companies often use hedging strategies to manage these risks, but this can also limit potential upside during price rallies.

For example, the sudden drop in gold prices in 2013 had a profound impact on the mining industry. Many companies, including those with high-cost operations, were forced to cut costs, delay projects, or close unprofitable mines.

Capital Expenditure and Return on Investment (ROI):

Developing a gold mine requires substantial capital investment, often running into billions of dollars. These costs include exploration, feasibility studies, environmental permitting, infrastructure development, and equipment procurement. The capital intensity of gold mining makes ROI a critical financial metric.

For example, Barrick Gold’s Pueblo Viejo mine in the Dominican Republic, one of the largest and most capital-intensive gold projects in the world, required an initial investment of over $4 billion. Despite the high upfront costs, the project has become one of Barrick’s most profitable operations, with low AISC and high-grade ore contributing to strong ROI.

Environmental and Social Governance (ESG) Costs:

The modern gold mining industry faces growing pressure to adhere to stringent environmental and social governance (ESG) standards. These requirements, which include responsible mining practices, community engagement, and environmental protection, often result in higher operating costs but are essential for maintaining social license to operate and reducing financial risks.

For example, Newmont’s Yanacocha mine in Peru, one of the largest gold mines in Latin America, has faced significant ESG challenges, including protests from local communities over environmental concerns. These challenges have led to delays, increased costs, and negative publicity, illustrating the financial risks of not adequately addressing ESG issues.

Political and Regulatory Risks:

Political and regulatory environments can have a significant impact on the costs and viability of gold mining projects. Changes in government policies, tax regimes, or mining regulations can lead to increased costs or operational delays. Companies operating in politically unstable regions face heightened risks, including the potential for expropriation, legal disputes, or disruptions due to civil unrest.

For example, Acacia Mining, a subsidiary of Barrick Gold, faced severe challenges in Tanzania when the government imposed a ban on the export of unprocessed gold and accused the company of tax evasion. The dispute led to a significant drop in Acacia’s share price, legal battles, and ultimately, Barrick’s decision to buy out minority shareholders and take full control of the company to resolve the situation.

Conclusion

This article expands a detailed view of the economic and financial characteristics of global gold resources. It explores the challenges and trends shaping the future of gold mining, emphasizing case studies on popular and large gold mines.

Why should I be interested in this post?

Many emerging economies have significant gold resources, and understanding the economic impact of gold mining and trade in these regions is essential for students interested in global markets, economic development, and resource management. Management students should be aware of these challenges to promote sustainable and responsible business practices in industries reliant on natural resources.

Useful resources

Wikipedia Gold

Mining technology Nevada Gold Mines, US

Geology of Investors Elephants in the Nevada Desert: Carlin-type Gold Deposits

Corruption Watch South Africa’s history of gold mining – corruption, abuse, and secrecy

Only gold A Brief History of Gold

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Gold resources in the world

December 30, 2024September 15, 2024 by Nithisha CHALLA

Gold resources in the world

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents how gold production, reserves, and investments play a crucial role in national economies and global financial markets.

Introduction

Gold has been used for ornaments, jewelry, and religious artifacts since prehistoric times. Gold is found in various geological environments, including alluvial deposits, quartz veins, and sulfide ores. The formation process involves hydrothermal fluids depositing gold in the earth’s crust. The top gold-producing countries include China, Australia, Russia, the United States, and Canada. These nations contribute significantly to global gold production. The World Gold Council tracks these reserves, which are critical to national economic stability.

Global distribution of major gold-producing countries in the world

The top 3 gold-producing countries are China, Australia and Russia. These countries mine gold in large quantities and contribute significantly to global gold production. Gold mining is a significant industry in many countries, contributing to employment, infrastructure development, and economic growth.

Global Gold Production by Country in 2020

Source: Visual Capitalist

Global Gold Production by Country in 2020 by table

Source: Visual Capitalist

China

China has been the world’s largest gold producer since 2007, contributing to nearly 12% of global production. The government tightly controls the country’s gold industry, and the People’s Bank of China is a major buyer of domestically produced gold, reinforcing its role as a strategic economic asset. The Chinese government encourages gold production as part of its broader strategy to diversify its foreign exchange reserves and reduce dependency on the U.S. dollar.

China’s Gold Production in last 10 years
China's Gold Production in last 10 years
Source: CEIC Data

Australia

Australia is the second-largest gold producer, with significant mining operations in Western Australia. The country’s gold industry is a crucial part of its economy, contributing billions to GDP and employing thousands. Gold exports are a major source of foreign revenue, and companies like Newcrest Mining and Northern Star Resources are key players. Australia’s stable political environment and favorable mining regulations make it an attractive destination for global investment in gold mining.

Australia’s Gold Production in last 10 years
Australia's Gold Production in last 10 years
Source: CEIC Data

Russia

Russia is another leading gold producer, with significant reserves in Siberia and the Far East. The Russian government views gold as a critical asset for economic security, especially in light of Western sanctions. The Central Bank of Russia has been steadily increasing its gold reserves, positioning gold as a hedge against geopolitical risks and currency fluctuations.

Russia’s Gold Production in last 10 years
Russia's Gold Production in last 10 years
Source: CEIC Data

Geological Formation and Economic Viability

Economic Geology of Gold

Gold is found in various geological settings, including orogenic belts, volcanic arcs, and sedimentary basins. The economic viability of a gold deposit depends on its grade, size, and accessibility. High-grade deposits, such as those found in the Witwatersrand Basin in South Africa, are particularly valuable due to their high gold content per ton of ore.

Exploration and Development Costs

The process of discovering and developing a gold mine is capital-intensive. Exploration costs can run into millions of dollars, with no guarantee of success. Once a deposit is confirmed, the costs of development, including building infrastructure and obtaining permits, can be significant. The economic feasibility of a project is assessed through metrics like the internal rate of return (IRR) and net present value (NPV), which consider future cash flows and the cost of capital.

Types of Gold Deposits and Financial Implications

Primary Deposits and Investment Strategies

Primary gold deposits are often found in lode and vein formations. These deposits require underground mining, which is more expensive and complex than surface mining. Companies must carefully assess the financial risks associated with developing these types of deposits, including the potential for fluctuating gold prices, which can affect profitability.

Case study 1: According to Andrew Watson working at Geology of Investors, Barrick Gold’s operations in Nevada, particularly the Carlin Trend, represent one of the largest concentrations of high-grade gold in the world. The financial success of these operations is due to a combination of rich deposits and efficient mining practices. The Carlin Trend’s production has contributed significantly to Barrick’s bottom line, making it a cornerstone of the company’s global portfolio.

Secondary deposits and economic access

Placer gold deposits, found in riverbeds and alluvial plains, are easier and less costly to mine. These deposits were the target of historical gold rushes, such as the California Gold Rush and the Klondike Gold Rush. Placer mining is typically associated with small-scale operations, but larger companies may also exploit these resources when they are economically viable.

Case study 2: In regions like Africa and South America, placer gold mining is often a critical source of income for local communities. However, these operations can be risky due to fluctuating gold prices and the informal nature of many small-scale mining enterprises. According to Luca Raineri from IAI (Instituto Affari Internazionali), “the amount of gold illegally smuggled out of the Sahara-Sahel region is reportedly much greater than that smuggled out of the Great Lakes region, and its aggregate economic value higher than that of drug or migrant smuggling (Micallef et al. 2019; Hunter 2019). Politicization may explain the much greater attention dedicated to drug and migrant smuggling in the Sahara-Sahel and gold smuggling in the Great Lakes region.”

Tertiary deposits and unconventional gold resources

As traditional gold resources become scarcer, companies are exploring unconventional sources, such as seabed mining (also known as deep-sea mining, which is the process of extracting minerals from the ocean floor). These projects involve significant financial risk due to the high cost of deep-sea exploration and extraction. However, if successful, seabed mining could unlock vast new resources, potentially reshaping the global gold market.

Case study 3: Nautilus Minerals attempted to pioneer seabed mining with the Solwara 1 project off the coast of Papua New Guinea. Despite initial optimism, the project faced numerous financial and technical challenges, ultimately leading to the company’s bankruptcy. Gary Juffa, governor of Oro province, had questioned Pala in parliament saying, “In fact, developed nations have banned seabed mining or have spoken against it because experts and scientists have stated that the unknowns are too great to ignore, Leaders of coastal communities, if you do not stop this and do not watch this with concern, then you are failing your people.”

Gold Reserves and Their Economic Significance

Global Gold Reserves

Central Banks and Sovereign Wealth: Central banks hold significant gold reserves as part of their foreign exchange holdings. Gold serves as a hedge against inflation and currency risk, providing economic stability in times of financial uncertainty. Countries like the United States, Germany, and Italy have some of the largest gold reserves, which play a crucial role in their monetary policy.

Example – India’s Gold Reserves: India, with its deep cultural affinity for gold, also holds significant gold reserves. The Reserve Bank of India (RBI) has historically used gold as a key asset in its foreign exchange reserves. During the 1991 balance of payments crisis, India famously pledged part of its gold reserves to secure an IMF loan, highlighting the strategic importance of gold in national economic policy.

Gold as a Hedge and Investment Asset

Gold ETFs and Financial Markets: Gold exchange-traded funds (ETFs) have revolutionized how investors access the gold market. ETFs like SPDR Gold Shares (GLD) allow investors to buy shares that are backed by physical gold, offering a liquid and convenient way to invest in the metal. The rise of gold ETFs has significantly impacted the global gold market, influencing prices and investment flows.

Example – The Role of Gold in Portfolio Diversification: Financial advisors often recommend gold as part of a diversified investment portfolio. During periods of economic instability, such as the 2008 financial crisis, gold tends to perform well as a safe haven asset. Studies have shown that adding gold to a portfolio can reduce risk and enhance returns, particularly in volatile markets.

Conclusion

This article expands a detailed view of the economic and financial characteristics of global gold resources. It includes detailed case studies and examples, illustrating how gold production, reserves, and investments play a crucial role in national economies and global financial markets.

Why should I be interested in this post?

Gold has been used to maintain economic stability, especially during times of hyperinflation or economic collapse. Studying historical examples of this helps students analyze how governments can use resources to stabilize economies and maintain public confidence in financial systems.

Useful resources

Wikipedia Gold

Geology of Investors Elephants in the Nevada Desert: Carlin-type Gold Deposits

IAI(Instituto Affari Internazionali) Gold Mining in the Sahara-Sahel: The Political Geography of State-making and Unmaking

Only gold A Brief History of Gold

Mongabay Deep-sea mining project in PNG resurfaces despite community opposition

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

History of gold

December 30, 2024September 15, 2024 by Nithisha CHALLA

History of gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) covers the role of gold in ancient economies, the impact of gold inflows, the establishment and decline of the gold standard, and gold’s modern function as a haven and investment asset.

Introduction

Gold has been used since prehistoric times for ornaments, jewelry, and religious artifacts. Its lustrous appeal and malleability made it a symbol of wealth and power in ancient civilizations such as Egypt, Mesopotamia, and the Indus Valley. The Egyptians were among the first to extract gold and used it extensively for jewelry, burial masks, and other artifacts. Ancient Greece and Rome civilizations used gold coins for trade, symbolizing wealth and stability. During the Middle Ages, gold became central in European economies. And further exploration began all over the world in the quest for trade, standards, and currencies.

Ancient beginnings and the economic role of gold

As we know its lustrous appeal and malleability made it a symbol of wealth and power in ancient civilizations, gold was used as a currency in ancient civilizations.

Gold as a currency in ancient civilizations

Gold’s role as a medium of exchange dates back to the Lydians in the 6th century BC called “Lydian Coinage”, who is credited with minting the first gold coins. These coins became a standardized form of currency, facilitating trade and economic stability across the Mediterranean.

Ancient golden coins

Source: Gold RSSP

Later, ancient Egypt accumulated vast amounts of gold, which played a crucial role in their economy. Gold was used as a form of tribute, tax, and savings, solidifying its status as a store of value. The discovery of extensive gold mines in Nubia (modern-day Sudan) significantly contributed to Egypt’s wealth and power.

Economic power in classical and medieval times

Gold was central to the Greek and Roman economies. The Romans established a gold standard with the aureus, a widely circulated gold coin. This coinage system underpinned the economic stability of the Roman empire, and its collapse led to economic fragmentation in medieval Europe.

The Byzantine Empire’s solidus, a gold coin, maintained its value for centuries, reflecting the empire’s economic strength. Its stability and acceptance across Europe and the Middle East reinforced gold’s status as a reliable currency.

The Age of Exploration and Economic Expansion

Gold influx from the Spanish empire

The Spanish conquest of the Americas in the 16th century led to an unprecedented influx of gold into Europe. The capture of Aztec and Inca treasures, along with extensive mining operations in Mexico and Peru, flooded Spain with gold, significantly influencing the European economy.

This massive influx of gold contributed to the “Price Revolution” in Europe, where prices of goods and services increased substantially. This inflationary period marked a significant shift in the European economy, redistributing wealth and leading to economic and social disturbances.

African gold and trans-Saharan trade

Mansa Musa’s pilgrimage to Mecca in 1324, during which he distributed enormous quantities of gold, highlights the economic power of the Mali Empire. His lavish spending caused temporary inflation in regions he visited, underscoring gold’s influence on local economies.

Gold from West Africa was pivotal in the trans-Saharan trade, linking African economies with those of the Mediterranean and the Middle East. This trade network also facilitated the exchange of slaves, further intertwining gold with the global economy.

Modern era: Gold’s financial evolution

The Gold Standard

The gold standard emerged in the 19th century, linking national currencies to a specific amount of gold. Britain adopted it in 1821, followed by other major economies. The gold standard facilitated international trade by providing a stable exchange rate system.

According to the World Gold Council, the U.S. formally adopted the gold standard in 1900 with the Gold Standard Act, pegging the dollar to gold at $20.67 per ounce. And it explicitly states “An act to define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes”. This provided economic stability but also tied monetary policy to gold reserves, limiting the ability to respond to economic crises.

According to Lennard and Paker (2024) who published in CEPR, the rigid adherence to the gold standard during the Great Depression of the 1930s exacerbated the economic downturn. Countries like the U.K. abandoned the gold standard in 1931, allowing them to devalue their currencies and stimulate economic recovery. The U.S. followed suit in 1933 under President Franklin D. Roosevelt, who devalued the dollar and increased the price of gold to $35 per ounce.

Then comes the Bretton Woods agreement, Post-World War II, the Bretton Woods system established a modified gold standard, with the U.S. dollar convertible to gold and other currencies pegged to the dollar. This system stabilized global trade and finance until its collapse in 1971, when President Richard Nixon ended the dollar’s convertibility to gold, leading to floating exchange rates.

Gold as a Safe Haven Investment

Throughout modern history, gold has served as a “Safe Haven” during financial crises. For instance, during the 2008 Global Financial Crisis, gold prices surged as investors sought security amidst the collapse of financial markets. The price of gold reached an all-time high of over $1,900 per ounce in 2011, reflecting widespread economic uncertainty.

Gold pricing in the last 20 years (2004-2024)

Source: Market.us scoop

Central banks worldwide continue to hold significant gold reserves as a hedge against inflation and currency devaluation. Countries like the United States, Germany, and Italy have some of the largest gold reserves, underscoring its enduring role in global finance.

Gold in the 21st Century

Digital Gold and Financial Innovation: In the 21st century, gold has evolved beyond physical ownership, with financial instruments like exchange-traded funds (ETFs) allowing investors to gain exposure to gold without holding the metal. The SPDR Gold Shares (GLD) ETF, launched in 2004, became one of the largest and most liquid gold ETFs, reflecting modern investment trends.

Gold and cryptocurrencies: The emergence of cryptocurrencies has led to comparisons with gold, particularly Bitcoin, which is often referred to as “digital gold.” Both assets are seen as alternatives to traditional fiat currencies and are valued for their scarcity and independence from government control.

Conclusion

This article emphasizes the financial and economic significance of gold throughout history, supported by detailed case studies and examples. It covers its role in ancient economies, the impact of gold inflows during the Age of Exploration, the establishment and decline of the gold standard, and gold’s modern function as a haven and investment asset.

Why should I be interested in this post?

Gold has been a key financial asset for centuries, acting as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. Understanding its history helps students grasp fundamental market dynamics and investor behavior, especially during periods of economic uncertainty.

Useful resources

Wikipedia gold

World gold council The Heyday of the Gold Standard, 1820-1930

Lennard J. and M. Parker (2024) The end of the gold standard and the beginning of the recovery from the Great Depression

Only gold A Brief History of Gold

Focus economics Gold: The Most Precious of Metals

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

The Premium on coins like Elizabeth II

Introduction

Computation of the premium on coins like Elizabeth II

The Investment Potential of Numismatic Coins

Understanding the Premium: What Sets These Coins Apart?

Mintage Numbers and Rarity

Condition and Grading

Demand and Market Trends

Notable Elizabeth II Coins

The Financial Benefits of Investing in Premium Coins

Diversification of Investment Portfolio

Appreciation Potential

Tax Benefits and Legacy Planning

Risks and Considerations for Investors

Finally why Coins Featuring Elizabeth II Remain an Attractive Investment?

Conclusion

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Academic research

Business

Other

About the author

The Gold Standard

Introduction

The Gold Standard’s Role in Economic Stability

Stabilizing Exchange Rates

Preventing Inflation

International Trust and Trade

Countries that Opted Out of the Gold Standard

The Great Depression and the Decline of the Gold Standard

Transition from the Gold Standard to the Bretton Woods System

Conclusion

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Academic research

Business

Other

About the author

FortKnox: the US Gold Reserve

Introduction

The Role of Fort Knox in U.S. Financial History

Security Measures and Infrastructure at Fort Knox

The Contents of Fort Knox

Economic and Financial Relevance Today

Conclusion

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Academic research

Data

Other

About the author

Relation between gold price and interest rate

Introduction

The Inverse Relationship

Opportunity Cost

Currency Exchange Rates

Or is it a complex relationship?

The Historical Perspective

The 1970s

The 2000s

The Role of Central Bank Policies

The Impact of Geopolitical Risks

Conclusion

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Other

About the author

World Gold Council

Introduction

Who owns the World Gold Council?

Key roles of the World Gold Council

Market Development

Market Intelligence

Advocacy and Policy

Impact of the World Gold Council

Key Statistics and Trends