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Market Encyclopedia

Date: 2016-03-20

Market Encyclopedia

1. What are the strengths of gold investment?

The international gold market has recorded a history of hundred years, and numerous countries, funds and investors around the globe get involved in the gold market. As a kind of world-recognized investment vehicle, gold secures a position that cannot be replaced by any other investment vehicle. The history proves that gold is worth the investment, because it enjoys many advantages, like the globally-unified quote, strong capacity to resist the inflation, lower investment cost compared with stocks, easy transfer of the ownership thereof, flexible in cashing and easy to trade and pledge, etc. As a result, gold investment is highly favored by international investors and domestic professional wealth management experts, and is gradually known by the general public, and becomes an indispensable constituent of the investment portfolio.

2. What are the relative advantages of gold investment?

Conforming to the international practice and being the most transparent investment

A regional stock market is likely to be manipulated by the people, but this situation is impossible for a gold market. Because the gold market is a universal investment market, there isn’t a financial group that has such powerful strength to manipulate it. Although some institutions attempt to make a certain gold market, the unfairly-pulled price will ultimately fall when other markets start the trading, so the actual supply and demand of the market will be reflected normally again. It is such a difficulty in making the gold market that furnishes gold investors with solid guarantee.

Mingling with the long-term investment and allocating the assets reasonably to achieve high return but low risk

The long-term investment will incur a low risk, so the return on long-term investment is also lower than that of the short-term investment. Nevertheless, an extremely-low return on investment will lose the essential meaning of investment. Investor can make the gold investment as the short-term investment, and mix it with the investment in securities, stocks and other long-term investment portfolios. The overall risk will stay at relatively low level if the allocation is appropriate, thus realizing relatively high return. Overall, the best investment plan is to make full use of the strengths and weaknesses of long-term and short-term investments to allocate the assets reasonably.

Optimal tool to maintain the asset value and resist the inflation

The price of gold is closely following the oil price, which is because investors invest their assets in the gold market to avoid the depreciation of assets. Gasoline, representing the commodity futures, the rising of its price means the possibility of inflation. Under such circumstance, investors will buy in the gold to resist the inflation, thus avoid the loss caused by the asset depreciation.

Relative strength in taxation

The investment in gold shoulders the lightest tax burden. Tax involved in the gold trading is only the customs declaration expense when the gold is imported. However, lots of other investment varieties are always levied many taxes that are easily to be ignored by investors.

3. Why is the gold a natural currency?

“Money is not the gold or silver by nature, but gold and silver are the money by nature.” In the process of selecting the material of money, gold highlights such features as easy taking and constant quality, etc., making the gold become a medium of exchange widely recognized by the public. As a universal equivalent, gold becomes the focus of the world because of its scarcity and natural property. Gold is actually the labor product of the human being and coagulates the social value. Furthermore, it possesses even texture and easily to be cut, thus enjoying the function of the unit of account. Small volume with large gravity, easy to carry and preserve, corrosion resistance and good malleability make the gold being circulated, paid and reserved as the currency. Besides, gold saves troubles in the international settlement and exchange rate of different currencies, enabling it to perform the function as the world currency. Gold, as a type of common utensil, enjoys the commodity attribute.

(1) Gold is a kind of asset, demonstrating its attribute as the money by nature

Featuring good physical characteristics, hard to deteriorate and exploit, and high exploitation cost, gold is used as the decoration by the human being, and is endued with the function of currency. Its rarity makes the gold become the token of the people's physical wealth, and also an important means for the people to pursue and accumulate the wealth, gold thus is highly favored by more and more people. When the time comes to the 1970s and as the financial market develops rapidly, gold's function as the currency was separated, which is simply the demonetization of gold. Nowadays, although the role of gold changes to some extent, it, as a kind of precious metal, remains as the major international reserve of all countries.

(2) Gold has a long history as the currency

At the initial stage of human society, gold was likely to be used as the currency and shoulder the function of payment for simple exchange in some regions abounded with gold. The most ancient gold coin unearthed in China is the “Ying Ai” forged by the State of Chu in the Spring and Autumn and the Warring States Period, which has a long history of more than 2,300 years. Besides, both the Persia Coin and the Coin of Old Rome and Alexander both boast a history of over 2,000 years. All of them are the fractional currencies used and circulated in a certain scope and region. It is the "Gold Period" stage in the 19th century that the gold becomes the currency circulated globally. After a heap of events, including Bretton Woods Conference that adopted relevant resolution and determined to establish the international currency system centering on the US dollar, many times of gold rush and the collapse of Bretton Woods System, the reform in the demonetization of gold starts. The revised Agreement of the International Monetary Fund was approved in 1978, marking the completion of the process of the demonetization of gold at the layer of system. Nevertheless, the demonetization of gold at the layer of system does not mean that gold has lost its function as the currency, just like that the gold has performed the function as the currency before the "Gold Period" stage.

At present, in addition to US dollar, Euro, Pound sterling and Japanese yen, gold is also used for the international settlement as the fifth international settlement currency. The commodity attribute of gold was not replaced till now. For example, during the financial crisis in the Southeast Asia and the Asia in 1998, the South Korean Government and the Thai Government repaid the debit through the gold donated by the civil organizations and survived the financial crisis, which demonstrates that the gold still plays its important role of function. The economist Keynes revealed the secret of monetary gold and stated “gold plays an important role in our system. It is the last guard and emergency required reserves, no other things can replace it." So gold can be regarded as a kind of quasi-money.

(3) Gold is also a kind of commodity.

Gold, as the commodity, is mainly used in the jewelry industry & electronics industry, by dentist, as well as for gold award and other industrial purposes. We must admit that the expensive price and the rareness of the gold restrict the purposes and scopes of the gold as the commodity, which is also the result of rigid control of the nations over the gold as the metal money. With continuous progress in the international financial system reform, the commodity attribute of the gold will be regressed gradually. The increasing demand for gold commodity will be of vital importance to the development of gold industry.

Gold Investment in Essence, By Li Wenyong


1. What are the characteristics and purposes of silver?

Argentum, also called “sycee” in the ancient China, is named silver because of its silver color.

Just like the gold, silver also boasts a very long history of more than 4,000 years and is a type of precious metals applied for a long period. Silver enjoys unique characteristics and dual value as money and decoration, both Pound sterling and silver ingot used in China before the liberation were made of silver and cooper.

Silver is more active than gold, it seldom exists in the status as an element, though its abundance in lithosphere is 15 times that of the gold, silver was thus found later than that of the gold. In the ancient times, people have already known the silver mines, but few quantity of silver was produced, so it was higher than that of the gold. From 1780 to 1580 before Christ, the law code of Egypt Dynasty specified that the value of silver should be double that of the gold. Moreover, the value of silver in Japan was the same as that of the gold in the 17th century.

Recently, domestic and overseas gold and silver markets sustained the “bull market”, attracting many enterprises (especially private enterprises) swarmed to the gold and silver markets to scramble the gold and silver. Most of the gold and silver are used as the money and used to make the decoration.

Silver has the following major characteristics:

(1) Silver colored, shining, soft texture and good malleability, melting point of 960.8 and the density of 10.49g/cm3.

(2) With the hardness between the gold and the cooper, silver records the Mohs hardness of 2.7. Besides, silver has good malleability, just following the gold. If it is rolled into the transparent foil with the thickness of 0.003mm, the silver nugget with the weight of 1g can be pulled into the filigree of 2km.

(3) In the liquid status, it can be mixed with the copper or other metals to form silver alloy.

(4) Strong conductivity. Among the metallic element, silver enjoys the best conductivity, the resistance of the silver with the length of 1 meter and with the cross section of 1 square meter is 0.0160606Ω.

(5) Sterilization and poison testing. The people in Inner Mongolia of China like making utensils in silver, like silver bowls, silver chopsticks, silver scoops and other utensils to fill the milk. Someone is used to placing a small silver plate in the dish to sterilize and test whether the food is poisoned. The scientific experience indicates that silver ion is of strong sterilization, thus silver utensils are effectual to fill the food for the purpose of testing poison and sterilizing. However, chemical experiment demonstrates that it is the silver reacts with sulfide to generate the silver sulfide, silver utensil thus turns black in terms of poison testing.

When treating the external injury, Ancient Egyptians also covered the wound with silver flake to make sterilization. In medical treatment, the solution of silver ion is also used to apply and flush the skin ulcer, which can kill most of bacteria.

(6) In the clean air, silver cannot directly combine with the oxygen, but can react with the ozone and generate silver oxide (in tawny). It can also generate silver sulfide after reacting with the zinc sulfide. Thus, silver will turn blackening in case of exposing to the air for a long time.

Silver is also “nobility” among the metals and is accordingly called “precious metal”. It was used as the money or made the decoration in the past. Nowadays, silver is used in many industries. Specifically:

(1) Photosensitive material

Silver halide photosensitive material is one of the areas using the most silver. At present, the top several photosensitive materials include photographic film, photographic paper, X-ray film, fluorescent information tap, electron microscope film and printing film. In the 1990s, the photography industry around the globe consumed about 6000t6500t of silver. With rapid development of electronic imaging and digital imaging technology develop fast, silver halide photosensitive material is used fewer and fewer, it still embraces huge market space, for it cannot be replaced in some areas.

(2) Electronic and electrical material

Electronic and electrical material industry consumes the largest amount of silver, usage including electrical contact material, composite material and welding material. Silver and silver-based electrical contact materials are divided into pure Ag, silver alloy, silver-oxide and sintered alloy. At present, the output of silver and silver-based electrical contact materials is about 2900t3000t in the world. Composite material refers to the materials made by the composite technology, including silver alloy composite and silver-based composite. From the view of saving the silver, silver composite is a new material with bright prospect. Welding materials of silver include pure silver welding material and silver-copper welding material.

(3) Chemical and chemical industry materials

Silver is mainly used in two areas in the chemical and chemical industry: silver catalyst, it is widely used in the oxidation-reduction reaction and polymerization reaction, as well as in processing the industrial waste gas with sulfide; and electronic and galvanizing preparation, like silver paste and potassium silver cyanide.

(4) Medical and antibacterial material

In the medical field, Ag-Pd is extensively used in the rehabilitation equipment of optic nerve recovery and baby spinal cord deformity. Silver-based alloy and Ag-Cu-Sn amalgam are the important materials to repair the teeth. Silver-series inorganic antibacterial material is continuous, persistent, broad-spectrum, good heat-resistance and high safety, its antiseptic property is nearly 2,000 times that of zinc. Antibacterial material can be used to make antibacterial cloth, antibacterial general merchandise, medical gauze, personal antimicrobial articles and public articles, etc. With the increasing standard of the people’s living, silver-series antibacterial material embraces a vast business prospect.

(5) Decoration

Being honored to be “metal of women”, silver is widely used to make jewelry, decoration, silverware, dishware, gifts, medals and commemorative coins. Silver jewelry has vast market in the developing countries and silverware is very popular in many families. Silver commemorative coins are exquisite but few of them are issued, so they have the function of value preservation and appreciation and are highly favored by the coin collectors and investors. In the 1990s, about 1000t1500t silver, accounting for 5% of the silver consumption, was used to forge coins.

Gold Investment in Essence, By Li Wenyong


1. What are the differences of the gold investment from the stock investment?

Investment in gold has some similarities with that in stocks, but also some differences, mainly evidenced by:

(1) The essence of gold investment is to evaluate the commodity value and financial value of the gold and to forecast the future price trend. The essence of stock investment is to obtain the ownership of corresponding shareholding of a listed company and to forecast the price trend of such shareholding. The gold investment bought thereby is the physical gold in corresponding quantity and specifications or the asset value corresponding to the gold price. The stocks bought thereby is actually the ownership of the corresponding shares of a listed company, such ownership can be provided with the dividends or be transferred.

(2) The gold investment analysis focuses on the macroscopical fundamentals. The stock investment analysis pays equal attention to the macroscopical fundamentals and the concrete corporate situation as well. For the gold investment, the analysis mainly involves the price of US dollar, macroeconomic trend, supply and demand relation of the gold and geopolitics, etc. The analysis of stock investment observes not only the macroeconomic trend, market fund liquidity and regulation policies of the stock market, but also the operation status, profitability, potential changes in equity and other information of the concerned company, etc.

(3) Different trading mechanisms

Multiple varieties of gold investment are available and there are different trading mechanisms, so attention should be given to different aspects. An investor is suggested to select the variety suitable to himself/herself according to his/her own risk preference and fund size. But the stock keeps relatively stable trading mechanism.

Specifically, an investor wants to invest in the gold futures must be familiar with the characteristics of futures margin trading mechanism, short mechanism, T+0 system and the influence of the delivery system on futures price. Overall, an eligible gold futures investor must be an eligible futures investor first of all.

But it is the different situation for the stock investment, stocks can be sold only after be bought and cannot be short selling (buying after selling). Besides, the stock market implements the T+1 trading (mainly A-shares). Compared with the investment in gold futures, the stock market incurs lower risk and lower fund efficiency as well.

(4) The liquidity and internationalization of gold is stronger than those of the stocks

Because gold is naturally a type of special commodity, easy to be preserved and carried, its value could not change because it is in different places, the trading space can be extended limitlessly and is not subject to the restriction of national boundary. But stocks have the attribute of regional financial products. The same stock cannot be freely converted in different countries, thus having limited trading space. Although QFII, QDII and other systems have come out at present, the stock trading is still influenced by the amount, exchange rate and other factors. Compared with gold, stocks are not very universal.

(5) Gold enjoys a stronger function of value preservation than that of stocks

Special commodity attribute and financial attribute of the gold determine it is a good vehicle of hedging. The stock is actually a type of warranty of ownership, which is influenced by politics, economic and many other factors and highly depends on the corresponding political and economic system, so the hedging function of stock is far weaken than that of the gold.

 Gold Investment in Essence, By Li Wenyong