All That Glitter!
When you hear the word wealth, you may imagine treasure chests overflowing with precious stones or Scrooge McDuck frolicking in a vault full of gold coins. Historically, Czechia was renowned for its rich deposits of silver, especially those around Jihlava and Kutná Hora, which enabled Czech rulers to dominate Central Europe between the thirteenth and fifteenth centuries, ultimately securing the seat of the Holy Roman Empire. What is less known is that Czechia also has gold deposits in places like Jílové u Prahy and Jeseníky Mountains. Learn more about the glittery metal from Michal Dvořák, an economist with the Czech National Bank who focuses his work on the financial markets and avoidance of financial crises.
No such thing as ‘pure gold’
Gold is found in the form of alloys that are more or less pure. By refining gold we can reduce the amount of other substances, but never completely. The purest form of gold ever created is used in chemistry and has a purity rating of 999.9999, which means that 1,000 grams contain 999.9999 grams of pure gold and 0.0001 grams of another substance. Investment gold has lower requirements of purity: anywhere from 995 to 999.9, meaning that 1 kilogram can contain anywhere from 5 to 0.1 grams of another element. Purity levels of 999 and higher are labelled as 24 carat gold. Most jewellers use gold of much lesser purity, because less is more when it comes to gold in jewellery, as very pure gold is too soft to wear.
How much gold is in the world?
It is estimated that we have extracted over 180,000 tonnes of gold so far, which is equivalent to a cube with a side longer than 21 metres – about the height of the big Christmas tree in Prague’s Old Town Square. Apparently an additional 54,000 tonnes remain under ground. Although we often think of South Africa when talking about gold mining, today China is the biggest gold producer, followed by Australia and Russia. Gold can be found in every stream and river, but not necessarily in concentrations high enough to make it worth your while to mine.
Gold is soft
Gold is relatively soft and malleable. It is this quality that has made it useful as a currency, as it is easy to divide to pay for smaller expenses. The melting point of gold is lower than that of iron, which has made it possible to work with gold since antiquity with fairly simple technologies. One troy ounce of gold – named after the French town of Troyes – represents a little more than 31 grams of gold and can be hammered into a thin sheet with an area of 10 square metres. If you have ever wondered how one could gold-plate the roof of the National Theatre or cathedral domes without going into debt for evermore, you have found your answer.
The gold standard
Some economists and old-timers yearn for the time of the gold standard, when the value of money was tied to the precious metal. A fixed relationship between money and gold meant that a person could walk into a bank with a certain amount of banknotes and exchange them for a fixed amount of gold. This way central banks couldn’t print money as they pleased, which stabilised purchasing power. The problem, however, was that the amount of money in circulation was tied to the existing volume of mined gold. And that is not good over the long-term because when the volume of business grows, in step with growth in population and productivity, yet the amount of printed money remains stationary, then you start running out.
‘Physical gold’ not the only investment option
In addition to buying gold bars and coins, investors can purchase financial investments that are tied to the price of gold. These include exchange-traded funds that have gold in their portfolios, shares in gold mines and gold futures, which represent a contract to sell or buy gold at a future date. These alternatives to physical gold offer investors more comfortable and faster ‘buy and sell’ options with lower transaction fees and zero storage costs. But they won’t replace the sense of security from knowing that there is a ‘gold bar’ stashed in your home. Also they will not insure against the collapse of financial markets, because with financial investments you ‘own’ gold only through a vulnerable intermediary.
When people hear the word gold, they often imagine an ingot of gold. A classic example is a bar weighing 400 troy ounces – or 12.44 kilograms, very popular among central banks. At today’s price of gold and US Dollar exchange rate, this classic gold ingot is valued at approximately 10.5 million Czech crowns. Investors, on the other hand, prefer the more ‘storable’ 1-kilogram bars that are valued at roughly 850,000 Czech crowns. If this seems like an ideal way of storing property in a briefcase, don’t be fooled, as 1 kilogram of 1,000 Czech crown banknotes – the most popular notes in the Czech Republic – will amount to 1 million. Postage stamps or gemstones could give you an even better value to weight ratio.
Gold as insurance for a crisis
Investors flock to gold when there is a panic on the financial markets. Before the fall of Lehman Brothers in September 2008, which marked the beginning of the last global financial crisis, the price of gold was about US$700 for a troy ounce. It reached its peak value of US$1,900 in September 2011, when the crisis moved to Europe and raised questions about the survival of the eurozone. After market stabilisation, the price of gold dropped to today’s US$1,200. This trajectory should be a guide for would-be investors: if there is a crisis looming, it’s a good time to invest in gold. In other situations it is not a great choice: in contrast to stocks and bonds, gold doesn’t yield a regular income and its value is dependent on the mood of other investors. Over the past ten years gold has brought a return of 39 per cent, while American stocks have risen by more than 300 per cent.
What other precious metals make good investment?
Next to gold, other investment metals include silver, platinum and copper. In contrast to gold, these metals have greater industrial utility and thereby regular demand, so their prices don’t drop dramatically. Like gold, however, they do not offer a regular income stream and to be successful, an investor must be able to forecast demand and supply levels. Gemstones, including diamonds, are in a category of their own. In contrast to precious metals, each gemstone is an original, and so the largest or most interesting examples can yield very high prices – sometimes in the order of tens of millions of dollars. However, the process of buying and selling gemstones is very specific, takes a long a time (commonly in the form of an auction) and is therefore costly. Valuing a gemstone is also a difficult process, and high prices encourage fakes. Therefore, investing in gemstones is recommended only for qualified investors with long-term investment horizons.
We thank the Natural History Museum in Prague for lending us samples from its collection for the photographs in this story. For more information about the Natural History Museum, which this year celebrates 200 years since its founding, visit www.nm.cz .
text: Michal Dvořák | photo: Lina Németh | styling: Janka Murínová