The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.
However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.
Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.
The Periodic Table
The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.
Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:
Gases and Liquids Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
Lanthanides and Actinides Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
Alkali and Alkaline-Earth Metals Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
Transition, Post Transition Metals, and Metalloids There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
Super Rare and Synthetic Elements Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.
Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.
Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.
Gold as Money
Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.
Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.
Gold prices are on the rise due to the fear of a global slowdown. Wondering which countries have the highest amount of gold in their treasuries? A report by Statista ranks countries in order of their gold reserves as of June 2019. The quantities expressed are in metric tons.
10 | Netherlands – 612.46
9 | India – 618.17
8 | Japan – 765.22
7 | Switzerland – 1040.01
6 | China – 1916.29
5 | Russia – 2207.01
4 | France – 2436.06
3 | Italy – 2451.85
2 | Germany – 3367.95
1 | United States – 8133.53
The top spot on the list is taken by United States, which has 8133.53 metrictons of gold reserves as of June 2019.
Gold in the form of jewellery is not only used as a wearble but also works as a tool to tide over financial emergencies. So, buying gold has traditionally been a financial support system over the years.
There are ways of owning gold – paper and physical. You can buy it physically in the form of jewellery, coins, and gold bars and for paper gold you can use gold exchange traded funds (ETFs) and sovereign gold bonds (SGBs). Then there are gold mutual funds (fund of funds) which further invest in gold ETFs. There are gold MFs (fund of funds) which invest in the shares of international gold mining companies.
For buying physical gold, one may reach out to the neighbourhood jewellers. Few jewellers allow placing an order on their websites too. Further, there are e-commerce websites such as Amazon India, Paytm and Snapdeal where one can buy gold coins online to get the coins delivered at home.
PHYSICAL GOLD Jewellery Indians certainly cherish possessing gold. But owning it in the form of jewellery has its own concerns about safety, high costs, and outdated designs. Then there are the ‘making charges’, which could prove to be a costly affair. The making charges on gold jewellery, which typically ranges between 6 percent and 14 percent of the cost of gold (may go as high as 25 percent in case of special designs) are irrecoverable.
Gold Coin Scheme Gold coins can be bought from jewellers, banks, non-banking finance companies, and now even e-commerce websites. The government has launched ingeniously minted coins which will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other. The coins are available in denominations of 5 and 10 grams while the bars will be for 20 grams.
The Indian Gold Coin and Bar will be of 24 karat purity and 999 fineness carrying advanced anti-counterfeit features and tamper proof packaging. All coins and bars will be hallmarked as per the BIS standards. These coins are distributed through designated and recognised MMTC outlets and through specified bank branches and post offices. MMTC also offers a transparent ‘buy back’ option for Indian Gold Coin through its own showrooms across India. MMTC will repurchase the Indian Gold Coin, in intact tamper proof packaging and with original invoice, at the prevailing gold base rate.
Gold savings schemes Gold or jewellery savings schemes come in two forms. A typical one allows you to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweller) at a value that is equivalent to the total money deposited, including a bonus amount. This conversion is done at the gold price prevailing on maturity. In most cases, the jeweller adds a month’s instalment at the end of the tenure as a cash incentive or may even offer a gift item.
PAPER GOLD Gold exchange traded funds (ETF)
An alternate way of owning paper gold in a more cost-effective manner is through gold exchange traded funds (Gold ETF). Such investments (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. What’s more, the high initial buying and even selling charges that go into owning jewellery, bars or coins gives an extra edge to the low-cost gold ETF. The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold and therefore the benchmark is the physical gold price.
What you need is a trading account with a stock broker and a demat account. One may either buy in lump sum or even at regular intervals through systematic investment plans (SIP). You may even buy 1 gram of gold.
Even though there are no entry or exit charges there are three costs that come with gold ETFs. One is the expense ratio (for managing the fund) which is generally low compared to other mutual funds and is around 1 percent. Second, is the broker cost that needs to be accounted for every time you buy or sell gold ETF units.Third, which technically is not a charge but impact returns is the tracking error. It arises because of the fund’s expenses and cash holdings thus not mirroring actual gold price.
Sovereign Gold Bonds (SGB) Sovereign Gold Bond is another way of owning paper gold. They are issued by the government but availability is not ‘on-tap basis’. Instead, the government will intermittently open a window for the fresh sale of SGBs to investors. This could typically happen every 2-3 months and the window will remain open for about a week. For investors looking to purchase SGBs anytime in between the only way out is to buy earlier issues (at market value) which are listed in the secondary market.
Digital gold You can now purchase gold coins, bars and jewellery online. ‘Digital Gold’, is offered on the mobile wallet platform of Paytm and ‘GoldRush’ is offered by the Stock Holding Corporation of India on their website, while Motilal Oswal has launched Me-Gold, a digital gold online investment. All of these are offered in association with MMTC – PAMP, (a joint venture between public sector MMTC and Switzerland’s PAMP SA)
Making a choice The initial cost of owning physical gold in the form of bars or coins is anywhere around 10 percent and it is even higher for jewellery. SGB and Gold ETF, both paper-gold, are cost effective as there is no entry cost in SGB while costing for gold ETF could be around 1 percent.
SGB should benefit those who want to invest in gold for a longer period as its maturity is after 8 years, although the lock-in ends from the fifth year. However, gold ETF provides much better liquidity than SGB. Owing units is much easier than SGB as it’s entirely online in case of ETFs. The risk of owning, holding also doesn’t exist in both.
The big difference is on the taxation front. Gains in SGB on redemption are tax-exempt but gains in Gold ETFs after 3 years are subject to 20 percent tax post indexation.
The only disadvantage with gold ETFs is that its units won’t be earn the additional interest of 2.5 per cent per annum like you would get for SGBs.
Get clarity as to why you need to invest in gold – is it for marriage purpose or for pure investment. For investments, one should not have more than 10 percent of the total portfolio in gold. Choose between Gold ETFs or SGBs depending on how comfortable you are managing investments online and keep the worries of purity, security aside.
The seventh Traders Carnival came to an end in Mumbai last week. The who’s who of the trading community gathered under one roof to share their expertise. From options trading to the Gann theory, the event covered a whole host of subjects. Here are five key takeaways from the event:
The Big Lesson “Cutting your losses” is the biggest lesson that Atul Suri has learnt from this stock market. While a successful trade is measured in terms of money made, it is also measured on how small the losses were. “This market will give you opportunities. The problem is that most people are unable to cut their losses because their ego gets in the way and that’s where they get eliminated.
The Two Sides Of (Trading Options) Coin One is an options buyer while the other is an options writer. Yet, Chandan Taparia of Motilal Oswal and options strategies PR Sundar have created wealth for their clients. In this interview, both Sundar and Chandan Taparia talk about how their own trading ways are beneficial and also how options buying and writing can be a risky bet.
The How, The What & The Why Of Writing Options How writing options is useful in making money? What to do with your options when you are bullish and bearish? Options strategist Jegathesan Durairaj explains how it works, depending on the way he views the market.
Do Your Own Research! (Can’t Emphasize Enough) When we asked JC Parets of AllStarCharts about how he manages to read 5,000 charts in a week, his answer was “I don’t know why others don’t!” Preferring to stay away from the fundamentals of a stock, Parets uses RSI (Relative Strength Index) as one of the major indicator for analysing a chart.
Trading And Psychology Does ego play a key role in executing a trade? It does. For stock traders, a losing trade is a wrong trade. People start to doubt their system and skills and search for newer methods when that happens, said Rakesh Doshi, a member-broker of the National Stock Exchange. In this session, Doshi talks about conditioned behaviour and various other aspects related to a trader’s
