PracticeMaonagemen
Peter Blake
Investing In Gold
This is the second in a series of six
articles discussing personal
financial management for
physicians. Mr. Blake is a
chartered accountant in the
Toronto area. Reprint requests to:
Penthouse 6, 701 King Street West,
Toronto, ON. M5V 1M9.
rrHE ORIGIN of its value is said to
1 lie with the Egyptians-its color is
that of the sun, which they worshipped
as the source of all life. It is now uni-
versally accepted as the standard of
economic wealth. Its dense property
makes it easy to fit large amounts in
small spaces; it is malleable, doesn't
rust, and will melt only at tempera-
tures exceeding 1064°C. Its rarity and
allure have led many a man to abandon
his senses at the promise of procuring
it. What is it? It is, of course, gold.
In this article, we'll discuss whether
gold is a good investment for the
1 980s.
The Basics
Before beginning our discussion
about gold as an investment, it's im-
portant to define some commonly used
terms that pertain to gold.
Karat: This is an American measure
of the purity of gold; each karat repre-
sents 1/24 pure gold; hence, ten karat
gold is 10/24 or 42% pure and 24 karat
gold is 100% pure.
Troy ounce: This is a measure of the
weight of gold, but it differs from the
standard avoirdupois ounce; there are
12 troy ounces in a troy pound; one
troy ounce is the equivalent of about
31.1 grams or 1.1 avoirdupois
ounces.
Fineness: An important characteris-
tic of gold is its fineness, i.e., the pro-
portion of pure gold in the gold alloy;
the highest possible is .9999, and for
CAN. FAM. PHYSICIAN Vol. 30: JULY 1984
investment purposes, only levels
above .995 are acceptable. In buying
gold bullion, the fineness is usually
stamped on the gold, along with the
weight and the refiner's name.
Assay: This is a test performed to
determine the gold's fineness; it may
be required before gold that was not
bought from a recognized refiner can
be sold.
Gold producers: South Africa, pro-
ducing about 50% of the world's pro-
duction, is the largest; the Soviet
Union is second at about 30%; Canada
is third, but only accounts for about
five percent of global production.
Why Invest In Gold?
Many investment counsellors advise
their clients to invest a certain percent-
age of their portfolios in gold. The rea-
sons are many. Gold has been an ex-
cellent hedge against inflation over the
years. Because it is widely considered
to be the monetary standard, the real
value of an ounce of gold is generally
quite stable-all other things being
equal. In other words, an ounce of
gold today will buy just as much, and
usually more, than an ounce of gold
would have bought 20 years ago.
Compounding the advantages of the
monetary standard feature are political
and economic factors. Gold's interna-
tional acceptability has meant that
when investors lose faith in either their
economic or political environment,
they hoard gold. As well, countries
that are heavy producers of gold, such
as Russia and South Africa, must sell
it in order to balance international
trade deficits. An example occurs
when the Russian wheat harvest is
poor-in order to obtain foreign
wheat, the Soviets must sell large
amounts of gold, thus causing a price
decline.
Another factor that makes gold at-
tractive is its portability. An individual
who is forced to leave a country can
take his gold with him, and conse-
quently, he maintains at least part of
his wealth.
For these reasons, for most inves-
tors, gold represents a hedge against
both inflation and economic or politi-
cal disaster.
Predicting Price Movements
Once the factors that make gold so
attractive are understood, it is easier to
understand which factors affect the
price of gold.
Wars and/or high rates of inflation
tend to decrease investor confidence in
other mediums and send the price of
gold upwards. As mentioned earlier, a
poor wheat harvest in Russia or a need
for the Soviets to obtain Western fi-
nancing can result in lower gold
prices.
Many people have tried to predict
the price of gold based on other mone-
tary indicators such as the stock mar-
ket, oil prices, the federal deficit level,
the U.S. dollar and other commodi-
ties. Few correlations exist, and those
that have existed for some time have
usually been proven false in the last
decade. Gold is basically an indicator
of political and economic health. In
bad times prices move up; in good
times they stabilize. There is really no
other theory that has stood the test of
time.
Investment Vehicles
Gold bullion
Generally, the most inexpensive and
perhaps the most attractive way to in-
vest in gold is to buy gold bullion. It is
available in sizes ranging from one
ounce wafers to the standard 400
ounce bar. The price you pay depends
1475
on the weight and fineness, which, as
mentioned earlier, are stamped on the
face of the wafer or bar. To illustrate,
if gold is selling at $400 per ounce and
you buy a two ounce wafer with a fine-
ness of .997, you would pay
2 x $400 x .997 = $797.60. Com-
mission is usually not charged, but the
refiner does pass on his manufacturing
costs in the form of bar charges. These
per ounce charges are highest for the
one ounce wafers and decline to zero
for the 400 ounce bar. Thus, if you're
buying ten ounces of gold, it is
cheaper to buy one ten ounce bar than
ten one ounce wafers. However,
beware-by opting for the cheaper
way you forfeit flexibility. For in-
stance, if you are holding ten one
ounce wafers, you can sell any number
of them at any time-say four. You
cannot sell four-tenths of a bar; you
must sell the entire ten ounces. As
well, if you are buying gold because
you believe it may one day be a form
of money used for bartering, ten
wafers would be of much more practi-
cal value than one bar.
Other advantages of buying bullion
include its liquidity, its international
acceptance, its portability, and the fact
that there is no sales tax on bullion
purchases except in the provinces of
Nova Scotia, New Brunswick and Sas-
katchewan.
There are two main disadvantages
when you buy bullion. First, there are
storage or safekeeping charges; sec-
ond, you receive no cash inflows while
you are holding the gold (i.e., gold
bullion does not earn annual interest or
dividends).
If you do decide to invest in bullion,
there are two more things you should
be aware of. First, it is best to buy only
from internationally recognized re-
finers; this will avoid assay charges
when you wish to sell. Examples of
acceptable refiners are the Royal
Canadian Mint, Englehard Industries
and Johnson Matthey. Second, you
should buy only from a reputable
dealer. In Canada, the Bank of Nova
Scotia, Guardian Trust and the Cana-
dian Imperial Bank of Commerce
would all be good choices.
Gold coins
There are two types of gold coins-
bullion coins and numismatic coins.
Bullion coins such as the popular
South African Krugerrand or the Cana-
dian Gold Maple Leaf, are very similar
to bullion for 'investnient purposes.
1476
The basic differences are that you will
pay a premium for the coin (as much
as ten percent more than the gold con-
tent value), and sales tax is charged on
coin purchases in all provinces except
Prince Edward Island, Newfoundland,
Quebec and Alberta.
The coins have a high fineness (the
Gold Maple Leaf is .9999) and usually
weigh one ounce, so that their gold
value is easily determined. Although
they have no numismatic value, the
coins should be left in their original
wrapping; any dents or scratches will
detract from their value.
Most coins have a face value which
theoretically provides a lower limit to
the coin's value. However, since the
face value is usually less than ten per-
cent of the gold value, this feature can
be virtually ignored.
Numismatic coins are a quite dif-
ferent investment. Essentially they are
collectibles, and as such their value is
governed.by their age, rarity, intrinsic
beauty, condition and historical signi-
ficance. Although gold prices do influ-
ence the price of these coins, some
may be selling for five or ten times
their gold value anyway, so the gold
price is usually a minor factor.
As with any other collectible, the in-
vestor must have a good deal of
knowledge about what he's buying and
who he's buying it from. Because this
type of investment is not liquid, you
will probably receive a lower price if
you try to unload a coin quickly.
Despite some disadvantages, many
numismatics will testify that collecting ties) manaEgement competence, divi-
coins can be an enjoyable and reward-
ing pastime. But a word of caution for
the uninitiated-those medallions of-
fered by direct mail are not generally a gand shares i n future mines.
wise investment. If you wish to invest
in numismatic coins, start by buying
from only the most reputable dealers.
-
Gold certificates
A means of investing in gold that is
becoming more popular is the gold
bullion or gold coin certificate. This
gives the purchaser at any time the
right to demand the fair market value
of the amount of gold or gold coins
stated on the certificate, or if desired, ounce and the mine's production cost
to take delivery of the actual gold or
coins.
A certificate offers the stability and price increases were expected.
security of a gold investment but does
not have the storage risks and costs as- (referred to as penny stocks), re-
sociated with bullion or coins. Sales member that you are buying highly
tax is usually imposed only if delivery speculative investments. Chances are
is taken.
The major dealers offer certificates
but certificzates are by no means all
alike. Comnnissions charged vary from
0.25% to th ree percent. Some dealers
may require certified cheques; others
-
may compllete the deal by phone.
Some dealeDrs charge manufacturing
costs only i if delivery is taken; others
charge in an y case. Some offer certifi-
cates for as little as one ounce; others
require the iinvestor to buy a minimum
of five or tern ounces. Hence, compari-
son shoppinjg is probably worthwhile.
Before bulying certificates it is wise
to note that Revenue Canada has indi-
cated that iif a holder of a certificate
takes deliveiry of the gold, he will be
deemed to h ave disposed of the certifi-
cate at its faiir market value and to have
purchased thie actual gold at that same
value. This , would trigger a capital
gain on the eextent the price of gold had
increased siince the certificate's pur-
chase. Therrefore, tax would be pay-
able, even though no cash was re-
ceived. Althiough this view has yet to
be tested, anid may not have any back-
ing in law, iit might be best to buy cer-
tificates onl: y if you do not intend to
take possesssion of the underlying
gold.
Gold stocks
Investing in gold stocks is much the
same as invl esting in other stocks. Im-
portant cornsiderations include the
company's cearnings record, the price
to earnings rratio, the current ratio (cur-
rent assets divided by current liabili-
dend payout history, etc.
There ar basically two types of
goldrtocks e: shares in existing mines,
shartantt factors to consider when
Important
evaluating s] ,nares in an existing mining
mnqnv
'JlalllY aree the FU1
ntlitical ennvironmennt
" a19 % M 1L1%,CL %-llV11V1lllll,1l;
within its mines (should be stable), the
expected reserves in its mines, and
each mine's production costs. Produc-
tion costs are usually looked at on a
per ounce basis because this makes
profitability easy to determine. For in-
stance, if the price of gold is $300 per
is $325 per ounce, these shares would
be a bad purchase unless dramatic gold
When buying shares in future mines
fairly high that the mine will either
CAN. FAM. PHYSICIAN Vol. 30: JULY 1984

never be started or that, if started, no
gold will be found. As such, the rules
for investors are:
1. don't invest;
2. if you must invest, invest in more
than one stock, so that your chances of
profit are higher;
3. try to avoid companies that are not
widely traded or that have already in-
cuffed debt;
4. don't invest money you're not pre-
pared to lose.
Gold options and futures
If an investor can predict the price
of gold accurately, then options and/or
futures could be the investment of
choice. These investments allow you
to earn profits when gold prices are ris-
ing or when gold prices are falling-
you simply must predict which way
prices will go.
A futures contract is a contract to
sell or buy a specified amount of gold
at a given future date. Let's assume
that you expect the price of gold to
fall. You would enter into a futures
contract to sell, say, 100 ounces of
gold three months from today. The
price would be similar to the current
trading price. Three months later when
the price of gold has fallen, you buy
gold at the lower price and sell it at
your higher contract price.
Similarly, if you expect the price of
gold to rise, you would enter into a fu-
tures contract to buy gold at a later
date.
An added enticement to the futures
contract is that brokerage houses re-
quire as little cash as five percent of
the value of the contract, with the rest
being borrowed on margin. Thus, one
can purchase a large amount of gold
with a small amount of cash and,
hopefully, earn a large profit on a rela-
tively small investment.
The risk, of course, is that the price
will move in the opposite direction to
that which you've chosen. If this
occurs, you are still responsible to buy
or sell the gold as stated in the con-
tract. Thus, you run the risk of losing a
fair amount of money rather quickly.
The difference between an option
and a futures contract is the level of
risk. An option is similar to a futures
contract, but it only gives you the right
CAN. FAM. PHYSICIAN Vol. 30: JULY 1984
to buy or sell gold at a specified price
in the future. Therefore, you are not
bound to buy or sell if the price has not
moved in the direction you antici-
pated. If the price does move in the ex-
pected direction, then you exercise the
option; if the converse occurs, you
simply let the option expire. You will
still lose money if you predict incor-
rectly, but you won't lose more than
your investment, as you could on a fu-
tures contract.
As mentioned earlier, the price of
gold is largely dependent on political
and economic factors, which are not
always predictable. Thus, investing in
options or futures contracts should
only be done by those quite familiar
with the gold market and those who
are willing to speculate.
Jewellery
Many people consider their jewel-
lery to be an investment in gold, but
unfortunately, this is not a sound
theory.
To begin with, most jewellery is
less than 24 karat gold; thus, it would
be unacceptable for investment pur-
poses. As well, the price of jewellery
is usually more than its equivalent gold
value. Sales tax costs are high, and
most jewellery could hardly be called a
readily negotiable commodity or even
remotely a liquid investment.
Therefore, if you wish to invest in
gold, jewellery is not among your via-
ble alternatives.
Condusion
Gold has always been and will
likely continue to be a wise invest-
ment. The 1980s have provided us
with a wide variety of investment vehi-
cles for it. In addition to the ones de-
scribed, there are gold funds, managed
gold accounts and bullion accounts.
As well, investment sizes suit virtually
every pocketbook-from $500 to
$200,000.
In times like these, when economic
and political upheaval is becoming the
norm rather than the exception, there
is very little to be relied on. However,
history has proven that those who have
relied on gold have seldom been
wrong.
Intermediate Prescribing Information
SIow Fe folic®
(dried ferrous sulfate and folic acid)
hematinic-hematopoietic
Indications and Clinical Uses
Prophylaxis of iron and folic acid deficiencies
and treatment of megaloblastic anemia, during
pregnancy, puerperium and lactation.
Contraindications
Hemochromatosis, hemosiderosis and hemolytic
anemia.
Warnings
Keep out of reach of children.
Precautions
The use of folic acid in the treatment of pernicious
(Addisonian) anemia, in which vitamin B12 is
deficient, may return the peripheral blood picture
to normal while neurological manifestations
remain progressive.
May aggravate existing peptic ulcer, regional
enteritis and ulcerative colitis.
Iron, when given with tetracyclines, binds in
equimolecular ratio thus lowering the absorption
of tetracyclines.
Adverse Reactions
Nausea, diarrhea, constipation, vomiting,
dizziness, abdominal pain, skin rash, headache.
Symptoms and Treatment of Overdosage
Signs of toxicity from folic acid have not been
observed.
Ingestion by infants and young children of doses
of ferrous sulfate in excess of 2 gm may cause
death and ingestion of 1 gm could be considered
toxic. Iron poisoning is rare in adults.
Symptoms: Occur in four phases. (1) abdominal
pain, nausea, and vomiting, about 30 to 60
minutes after ingestion. Irritability, pallor, and
drowsiness appear, along with frequent black
or blody diarrhea. Symptoms of acidosis and
cardiovascular collapse may become prominent;
coma and death ensue within 4 to 6 hours in about
20% of children taking large doses of iron. (2) a
period of improvement, with subsidence of the
initial symptoms spontaneously or in response to
treatment, lasting 8 to 16 hours. (3) progressive
cardiovascular collapse, convulsions, coma, and
a high mortality about 24 hours after ingestion.
(4) gastrointestinal obstruction from scarring of the
stomach or small intestine may occur weeks or
months after the initial episode of iron intoxication.
Treatment: give milk immediately and induce
vomiting. Feed with eggs and milk until it is
possible-to perform gastric lavage. Within the first
hour, administer gastric lavage with a 19% solution
of sodium bicarbonate, to convert the iron to a less
soluble form. Remove iron from the lower bowel
by an enema. Give an iron-chelating agent eg.
DESFERAL. Combat peripheral vascular collapse
including early replacement of body fluids and
electrolytes. Use oxygen and vasopressor sub-
stances to help combat shock. Use barbiturates
or paraldehyde to control convulsions.
Dosage and Administration
Prophylaxis: 1 tablet daily.
Treatment of megalblastic anemia: During
pregnancy, puerperium and lactation; and in
muitiple pregnancy: 2 tablets daily in a single dose.
Tablets to be swallowed whole.
Availability
Film-coated tablets each containing 160 mg dried
ferrous sulfate (equivalent to 50 mg elemental
iron) and 400 micrograms folic acid in a specially
formulated slow-release base. The tablets have a
pale yellow colour with CIBA on one side and
identification code TP on the other and are supplied
in push-through foil packs of 30 and 120 tablets.
Product Monograph supplied on request.
Mississauga. Ontario
L5N 2W5