The precious metals industry is filled with jargons that are alien to most people. Industry players often use terms such as ETFs, paper gold and troy ounces among others that may as well be a foreign language to the most of us. Here we will look into some of these terms and hopefully they shed some light on what they mean explained in the simplest way possible.
ETFs or exchange traded funds are basically marketable securities that track indexes were introduced in the US specifically to trail or keep track of gold price and was regarded as a less expensive method for owning physical gold or gold futures for that matter. These exchange traded funds are widely accepted alternatives as investors are able to seek out gold related ETFs and participate in the precious metal industry without exposing themselves to the risks that are usually associated with purchasing physical bullion. Trading of ETFs is much like common stock, however they have higher daily liquidity ratios and lower commissioning fees in comparison to mutual funds which is what makes ETFs a preferred ‘trade element’ for the individual investor.
A Troy ounce is basically a unit of imperial measure that has been associated with precious metals for a significant amount of time. The Troy weight system is almost completely derived from the conventional Roman monetary system (the use of bonze bars as money that varied in weights) and in comparison to the Avoirdupois system which is the standard measuring unit for most other elements. The Troy ounce is heavier than the Avoirdupois ounce by about 10 % with the Troy ounce at precisely 31.1034768 g and the Avoirdupois ounce at 28.349523125 g. Thus the London fix bases the price of gold according to troy ounces and when somebody says an ounce of gold, it most certainly would mean 31.1 grams of gold.
Karats or Carats
A karat with regards to precious metals is a simple form of defining the purity of an item containing gold, silver, platinum or palladium. Basically pure gold (or any other precious metals) is rated as 24 karats – which means 24 parts out of 24 parts of that item is gold such as bullions (99.99 % gold). Thus in order to explain it in simpler terms 12 karats of a 30 gram gold jewellery piece would mean that only 50 % of that jewellery contains gold (12/24 x 100 = 50%). Similarly if that same 30 gram jewellery piece is rated as 18 K, then it is 18/24 x 100 which would be equivalent to 75 % which in turn means that only 75 % of that 30 grams contains gold (75 % X 30 grams = 22.5 grams).
The definition of ‘paper gold’ simply put, relates to a piece of paper that is in essence a substitute for actual physical gold. Paper gold became popular as investors did not have to bear the risks involved with owning physical gold, these risks were largely associated not only to security issues but also the cost of security. However, there is a twist to paper gold that most people are largely unaware of. When an individual owns paper gold, that individual does not ‘actually own a certain amount of physical gold’, that individual owns ‘a promise’ that he or she will receive physical gold when the individual decides to redeem it. The twist is the fact that paper gold clearly states that the individual will receive the amount of gold stated on his or her paper OR cash equivalent to the amount of gold stated on that piece of paper. In other words corporation issue the paper gold certificate which makes it subject to counter party risks which is far different from owning physical gold as it has no counterparty risk and is practically subject to your own control. Bear in mind that if the issuing corporation becomes bankrupt, the paper becomes worthless as you may not be able to redeem your gold or equivalent cash.
E-gold is the latest incarnation of gold based derivative which is much like paper gold with the only difference being instead of owning a promise of owning physical gold, you own an electronic value. It is the latest mode of investing in gold, which again much like paper gold allows investors to convert their bits and bytes to physical gold at any time or receive an equivalent amount of cash for it. E-gold is bought and sold in e-gold units via the National Spot Exchange (NSEL) and each unit of e-gold is equivalent to 1 gram that is basically traded without taking delivery. Although E-gold has become a hit among ‘electronic investors the point of the matter is that the existence of gold supporting each E-gold unit cannot be verified much like paper gold and thus, when the music stops those trapped at the bottom may not see a single penny.
When it comes to investing in gold there is no substitute for physical gold – and that is a fact!
Contributed by http://www.brisbanegoldcompany.com.au/