Investing In Gold: The Essential Safe Haven Investment for Every Portfolio
By Jonathan Spall
McGraw Hill 2008
195 pages. $27.95
The title of Jonathan Spall’s book is Investing in Gold. And it’s a good book. But it should be noted that Investing in Gold speaks more to the subject of why you should invest in gold rather than how to invest in gold. As Spall indicates in his introduction, “This book is written for the broadest possible spectrum of those interested in precious metals, from private individuals to central banks, from mining companies to hedge funds.”
Spall begins by examining gold mining. He provides numbers about gold production throughout the world and describes mining operations. There are two types of gold mining, underground mining and open pit mining. Both have inherent risks. Underground mining’s major risks revolve around seismicity, temperature and the build-up of noxious gases. The primary risk associated with open pit mining is logistics. For the amount of physical material moved is staggering.
After the gold has been mined, it is refined. Spall gives an overview of the refining process, which is quite involved. London Good Delivery Bars are the industry standard, because of their purity.
From there, Spall moves on to discuss gold miners and hedging, which is no longer prevalent. His explanation of contango is interesting and instructive. Spall’s opinion of hedging is positive, because it “protects cash flow,” which is advantageous for the business side of mining. Hedging dwindled away, states Spall, due to “the gold price.” In other words, mining companies benefited from hedging if the price of gold remained low. If it rallied, the mining companies found themselves selling metal at below market prices.
In chapter 4, Spall takes a look at the official sector – which may be defined as central banks that hold gold. According to Spall, central banks buy and hold gold in order to maintain the status quo. The problem facing central banks is that once bought, gold is extremely hard to dispose of. Because of this, in the late 1990s, some banks started selling their gold, which unnerved investors. The game changed in September 1999 with the European central bank Gold Agreement. Fifteen central banks agreed not to enter the market as sellers. Spall points out that this agreement “allowed the recent rally in gold to all-time highs to take place.”
The information Spall provides in chapter 4 is politically and economically relevant, especially in today’s world. Investors would do well to read and study it.
Next, Spall discusses what are called “bullion banks,” a term Spall doesn’t care for. Here, he explains how spot gold is traded, along with how gold prices are “fixed,” and how gold interest rates are traded. Actually, as described by Spall, it is a complicated process. As Spall states, “The rationale behind trading IRS (interest rate swap)” is that it is credit-effective and takes advantage of rate spikes above the fixed rate.
Regarding hedge funds, Spall explains how “the fortunes of many Internet stocks and the U.S. dollar has been a wake-up call for the attractions of gold.” This wake-up call has caused lots of investors to jump into gold hedge funds. Spall believes this trend is a fad. And when it passes, such investors will find themselves trapped in a box with no way out. In other words, this is an arena for professionals only. And even professionals should exercise caution.
Spall’s next topic is gold exchanges. He gives an overview of the world’s exchanges and describes how they operate. Spall warns that gold exchanges are affected by local conditions, which means it’s easy to lose a lot of money fast, if proper care is not taken.
In chapter 8, Spall takes a close look at ETFs (exchange-traded funds), which came into existence “to open up the gold market to a broader range of investors.” Instead of buying physical gold, ETF investors own a company that owns gold. According to Spall, this is the simplest way to invest in gold. Other than that, Spall does not really give an opinion on ETFs, whether he recommends them or not. He waits until the last chapter of his book to set forth his thoughts on ETFs.
Spall proceeds to examine the myths and realities that surround gold. He briefly discusses gold as a diversifier, gold as a store of wealth, gold as an inflation fighter and conspiracy theories about gold. He debunks the conspiracy theories in short order. The existence of such theories in his estimation is because the price of gold is so sensitive. He does, however, believe that “gold can be a barometer of the global financial health.” Present economic conditions have “rekindled interest in the metal as an investment and as an important financial instrument.”
He expands on gold as an investment vehicle in chapter 11. Spall says bluntly, “If the U.S. dollar falls, then gold will almost always rise.” He believes the primary driver of gold’s price is the U.S. dollar. He recognizes that “all markets are sentiment driven, at least partly.” Thus, if the dollar is the main driver of gold’s price, then sentiment determines the direction. And because of current inflationary concerns in the major Western economies, Spall believes the situation is “unlikely to change suddenly.” He doesn’t come right out and say it, but the implication is there – the gold market will continue to go higher. And the dollar will go down.
The last chapter of Investing In Gold is where Spall gives tips on how to invest in gold. The tips are vague and unsatisfactory. First, he talks about equities, which he admits he knows nothing about. Essentially, he thinks equities might be a good investment, but only if you “know the sector extremely well.” As far as owning physical gold, Spall sees many disadvantages and very few advantages. And he doesn’t think much of gold futures either. Spall approves of ETFs, if the company is creditworthy. He also likes structured notes, because there’s really no downside. Yet he admits the upside isn’t much to brag about. In other words, structured notes are conservative, safe investments.
In his conclusion, Spall indicates his preference for ETFs as an investment. He believes that inflation, the weaker dollar, and a general loss of confidence in the global economic system “have all added to the positive sentiment that surrounds gold.”
Investing In Gold is a book that most investors should read, simply for a better understanding of the ins and outs of why gold remains important. For example, Spall clarifies the role and impact that central banks have on the gold market. Any investor will benefit from this knowledge. But if the reader is seeking investment advice, this is not the place to start.
On the Read-O-Meter, which ranges from 1 star (boring and bad) to 5 stars (stimulating and wonderful), Investing In Gold gets 3 stars.