Gold as an Investment

History

Gold was in use as a form of money, in one form or another, at least from 2560 BC until the end of the Bretton Woods system in 1971. It was used as a store of value both by individuals and countries for much of that period.

Since the end of the Bretton Woods system, gold has largely lost its role as a form of currency. The Central banks still use gold as an international trading and swapping currency. It is still considered by many as a store of value and a safe haven in times of crisis.

Central banks report holding large gold reserves, but groups such as the Gold Anti-Trust Action Committee point out that these reports are misleading as the central banks' official balance sheets do not differentiate between gold held in the banks' vaults and gold on loan.

Gold as a financial asset

Gold and other precious metals are assets that are both tangible and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible.

Considering its high density and high value per unit mass, storing and transporting gold is very easy. Gold also does not corrode. Historically, it was also very easy to verify that an offered coin had the density of gold through the use of Archimedes' principle. Today, however, some metals are denser than gold yet cheaper. While some think gold deserves special treatment based on its cultural value and use as money, others consider gold a commodity, like copper or lead.

For centuries gold has been used as a store of value. Gold advocates such as Bill Bonner argues in "Empire of Debt" that no other investment has the wealth preserving power of gold when your frame of reference extends to thousands of years. Bonner points out that other assets are dependent upon a certain government or political climate to retain value, appreciate, and not be excessively taxed or nationalized. Gold is largely independent of political climate (with the exception of laws specifically confiscating gold as happened during the Franklin Roosevelt administration).

Types of gold investor

Gold price

The usual benchmark for the price of gold is known as the London Gold Fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day.

The following table sets out the gold price versus various investments and key statistics (Note: the prices on the following table and graphs are expressed in terms of nominal dollars, and thus are not adjusted for inflation.):

Year to 31st December	Gold Price US$/oz	Silver Price US$/oz	S&P 500 [2]	Dow Jones Industrial Average [3]	Money Supply M3 [4] US$ billions	Average US Farm Wages [5] US$/hr	US Govt Debt [6] US$ billions
1910	20.67	0.54	9.05	59.60			2.6
1920	20.67	0.54	6.81	71.95			25.9
1930	20.67	0.33	15.34	164.58			16.2
1940	34.50	0.35	10.58	131.13			43.0
1950	40.25	0.80	20.41	235.42			257.4
1960	36.50	0.91	58.11	615.89	315.2		290.2
1970	37.60	1.64	92.15	838.92	677.1		389.2
1980	641.20	15.65	135.76	963.99	1,995.5	3.50	930.2
1990	423.80	4.17	330.22	2,633.66	4,154.6	5.52	3,233.3
2000	272.15	4.60	1,320.28	10,786.85	7,117.7	8.10	5,674.2
2005	513.00	8.83	1,248.29	10,717.50	10,191.4	9.51	8,170.4

Factors influencing the gold price

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, since almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. Given the huge quantity of above ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production or gold jewelry demand.

Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organisations held 19 percent of all above ground gold as official gold reserves. The Washington Agreement on Gold (WAG) which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 400 tonnes a year . European central banks, such as the Bank of England and Swiss National Bank, have been key sellers of gold over this period .

In November 2005, Russia, Argentina and South Africa expressed interest in increasing their gold holdings ^[10]. Other than Russia, these are not viewed as significant central banks, but any move by Japan, China or South Korea to do the same would be seen as significant. Currently the United States Federal Reserve has 16% of its assets in gold Federal Reserve gold holdings, whereas China holds approximately 1% in gold.

Although central banks do not generally announce gold purchases in advance, some such as Russia have expressed interest in growing their gold reserves again as of late 2005. In early 2006, China, who only holds 1.3% of its reserves in gold , announced that it was looking for ways to improve the returns on its official reserves. Many bulls took this as a thinly veiled signal that gold would play a larger role in China's reserves, which they hope will push up the price of gold.

Inflation fears have also been influential in the past. The October 2005 consumer price index level of 199.2 (1982-84=100) was 4.3 percent higher than in October 2004. During the first ten months of 2005, the CPI-U rose at a 4.9 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 3.3 percent for all of 2004.

Sentiment

It used to be said that "Gold is the world's frightened bunny". Whenever crisis threatened, the demand for physical gold increased.

Bank failures

When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.

Inflation

Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation. Historically, currencies have lost their value in this way over time. In times of inflation, people seek to protect their savings by purchasing liquid, tangible assets that are valued for some other purpose. Gold is in this respect a good candidate, since producing more is far more difficult than issuing new fiat currency, and its value does not rely on any particular government's health.

Low or negative real interest rates

Gold has a long history of being an inflation proof investment. During times of low or negative real interest rates when significant inflation is present and interest rates are relatively low investors seek the safe haven of gold to protect their capital. A prime example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

War, invasion, looting, crisis

In times of national crisis, people fear that their assets may be seized, and the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.

Production

According to the World Gold Council, annual gold production over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes.

Demand

About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

Supply and demand

Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and available for sale at a price. However, supply and demand do play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold exchange-traded fund, but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.

Methods of investing in gold

Investment in gold can be done directly through bullion ownership, or indirectly through certificates, accounts, spread betting, derivatives or shares.

Investment strategies

Fundamental analysis

Investors may base their investment decisions on fundamental analysis. These investors analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity, and energy prices. They would also analyze the total global gold supply versus demand. Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. Others point out that total mine production is only about 2,500 tonnes each year, leaving a 1,300 tonne deficit that must be made up by central bank or private sales. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity.

Gold versus stocks

The performance of Gold bullion is often compared to stocks. They are fundamentally different asset classes: gold is a store of value whereas stocks are a return on value (i.e. growth plus dividends). In a stable political climate with strong property rights and little turmoil, one would expect stocks to significantly outperform gold. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold due in part to the stability of the American political system. This appreciation has been cyclical with long periods of stock outperfomance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The ratio peaked on January 14th, 2000 at a value of 41.3 and has fallen sharply since. William Anton III wrote in the 2004 issue of Jefferson Coin and Bullion "...downward movement in the Dow/gold ratio is unlikely to stop precisely at the mean trendline. The extreme distension of the ing the 90s will likely overshoot to the opposite extreme in the current cycle.

Technical analysis

As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically this involves analyzing chart patterns, moving averages and market trends, in order to speculate on the future price.

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing gold assets and then purchasing more gold on account with the loaned funds. In order to keep the cost of debt to a minimum, these individuals would normally seek a loan in the currency with the lowest LIBOR, which as of April 2006 was the Japanese yen. This technique is referred to as a "yen-gold carry trade". Leverage is also an integral part of buying gold derivatives. Leverage may increase investment gains but also increases risk, as if the gold price decreases the investor may be subject to a margin call.

Gold's value versus money supply

Historically increases in the supply of paper money or fiat currency through increased money supply would cause the demand for gold to increase. There was a time when gold was money and vice versa. If citizens felt that there may be insufficient gold to cover the paper money in circulation, they would queue up at the bank to change their paper currency back into gold.

However, since the gold standard was ended on August 15, 1971, governments have been free to print as much money as they choose, without fear that their populations will come knocking on the central bank's door demanding to change their paper money back into gold.

In January 1959 US M3 money supply was $288.8 billion, and the official gold reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces (there are 32,150.7 troy ounces in a tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the theoretical price should then have been $518 per ounce, the actual price, as fixed under the gold standard was only $35 an ounce.

By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces . This means that today, in 2005, there are $37,831 in circulation for every troy ounce of gold held by the United States.

However, this increase of 75 times in the ratio of central bank gold holdings to debt does not allow for the fact that the gold standard was abandoned in 1971 and gold holdings have been deliberately and considerably reduced. Another far less dramatic way of looking at the same figures is this: In 1959 US government debt valued in gold was 8 billion Troy ounces, in 2005 US government debt was 20 billion ounces gold - an increase of only 2.5 times.

The above numbers show the falling influence of gold in today's monetary system. Gold bugs believe, or hope, that one day gold's importance will return as the printing of paper money gets out of control and before we end in a hyper-inflationary fiat money collapse.

The US Federal Reserve ceased publishing M3 data on 23 March 2006, with the last published data indicating a year-on-year growth rate of 8.23%. Central banks may see this as a reason to limit further increases in their reserves of dollars, and thus alternatives such as gold or the euro might be considered. Jon Nadler, an analyst at Kitco Bullion Dealers, said gold was still benefiting from August 30, 2006 release of the minutes to the last rate-setting meeting of the US Federal Reserve. The minutes to the August 8, 2006 meeting, at which the Federal Open Market Committee kept short-term interest rates unchanged for the first time since 2004, supported the view that US borrowing costs have peaked.

Supply

At the end of 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes , which would form a cube with 19.58 meter edges. Global gold mine production is between 2,500 to 3,000 tonnes per year, which would mean that about 155,000 tonnes of gold would have been mined as of 2006, with a total value of $3.2 trillion at June 2006 prices.

Bulls versus bears

Many analyists such as Henry Blodgett in his "Wall Street Self-defense manual" argue that gold's role in the world's monetary system has ended, and that it will never again represent the store of value that it once was. The gold price peaked at around $850/oz t ($27,300,000 per tonne) in 1980, and in real terms is still well below that. However, since April 2001 the gold price has more than doubled in value against the US dollar (as seen here), prompting speculation to circulate that this long secular bear market (or the Great Commodities Depression) has ended and a bull market has returned.

Taxation

Gold maintains a special position in the market with many tax regimes. For example, in the European Union the trading of recognised gold coins and bullion products is free of VAT. Silver, and other precious metals or commodities, do not have the same allowance. Other taxes such as capital gains tax may still apply for individuals, according to their jurisdiction. There is no capital gains tax in Switzerland.

Silver as an Investment

Silver, like other precious metals, may be used as an investment. For over four thousand years silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as legal tender in the United States. (It continued to be used in coinage until 1964, when the intrinsic value of the silver overtook the coins' face value.)

Silver price

The price of silver is notoriously volatile, as it fluctuates between industrial and store of value demands. At times this can cause wide ranging valuations in the market, creating volatility.

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The gold/silver ratio is often analysed by traders and investors. Over most of the 19th century the gold/silver ratio was fixed by law in Europe and the United States at 15.5, which meant one troy ounce of gold would buy 15.5 ounces of silver. The average gold/silver ratio over the 20th century was 47.0 .

Year to 31st December	Silver price US$/oz	Gold price US$/oz	Gold/silver ratio
1910	0.54	20.67	38.28
1920	0.54	20.67	38.28
1930	0.33	20.67	62.67
1940	0.35	34.50	98.57
1950	0.80	40.25	50.31
1960	0.91	36.50	40.11
1970	1.64	37.60	22.93
1980	15.65	641.20	40.97
1990	4.17	423.80	101.63
2000	4.60	272.15	59.16
2005	8.83	513.00	58.10
2006	12.62	628.20	49.78

From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per oz. for first time by late April of 2006. The monthly average price of silver was $12.61 per oz. during April 2006, and the spot price was around $13.68 per oz. on April 6, 2007.

Factors influencing the silver price

Private and institutional investors

From 1973 the Hunt brothers began cornering the market in silver, helping to cause a spike in 1980 of $49.45 per ounce and a reduction of the gold/silver ratio to 17.0 (gold also peaked in 1980, at $850 per ounce) [4]. However a combination of changed trading rules on the New York Mercantile Exchange (NYMEX) and the intervention of the Federal Reserve put an end to the game. In 1997, Warren Buffett purchased 130 million ounces of silver at $4.40 per ounce (total value $572 million). Similar to gold, the silver price has more than doubled in value against the United States dollar since December 2001 [5]. On May 6 2006 Buffett announced to shareholders that his company no longer held any silver. In April 2006 iShares launched a silver exchange-traded fund, called the iShares Silver Trust (NYSE: SLV), which as of April 2007 held 130 million ounces of silver as reserves.

The large concentrated short position

The CFTC publishes a weekly Commitment of Traders Report which shows that the 4 or fewer largest traders are holding 90% of all short contracts. This level of concentration is unprecedented in any commodity, and should arouse suspicion. Furthermore, these 4 or fewer traders are short a total of 245 million ounces (as of April 2007), which is equivalent to 140 days of production.

Industrial demand

The use of silver in items such as electrical appliances and medical products has increased since 2001. New applications for silver are being explored in batteries, superconductors and microcircuits, which may further increase non-investment demand. The expansion of the middle classes in emerging economies aspiring to Western lifestyles and products may also contribute to a long term rise in industrial usage.

Methods of investing in silver

Bars

A traditional way of investing in silver is by buying bullion bars. In some countries, like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter of the major banks.

Physical silver, such as bars or coins, may be stored in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer.

Various sizes of silver bars:

• 1000 oz troy bars. – These bars weigh about 68 pounds avoirdupois (31 kg), and vary about 10% as to weight, as bars range from 900 oz to about 1100 oz (28 to 34 kg). These are COMEX good delivery bars.
• 100 oz bars. – These bars weigh 6.8 pounds avoirdupois (3.11 kg), and are among the most popular with retail investors. Popular brands are Engelhard and Johnson Matthey. Those two brands cost a bit more, usually about 40-50 cents per ounce above the spot price, but that price may vary with market conditions.
• Odd weight retail bars. – These bars cost less, and generally have a wider spread, due to the extra work it takes to calculate their value, and extra risk due to the lack of good brand name.
• 1 kilogram bars (32.15 oz)
• 10 oz bars and 1 oz bars (311 and 31.1 g)

Coins

Buying silver coins is another popular method of physically holding silver. One example is the 99.99% pure Canadian Silver Maple Leaf. Coins may be minted as either fine silver or junk silver, the latter being older coins with a smaller percentage of silver. For example, U.S. pre-1965 half dollars, dimes, and quarters are 90% silver. (1965-1970 and 1975-1976 Kennedy half dollars are "clad" in a silver alloy and contain about 1/3 of the pre-1965 issues.)

Junk silver coins are also available as sterling silver coins, which were officially minted until 1919 in the United Kingdom and Canada, and 1945 in Australia. These coins are 92.5% silver, and are in the form of (in decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences, and threepence. The tiny threepence weighs 1.41 grams, and the Crowns are 28.27 grams (1.54 grams heavier than a US $1). Canada produced silver coins with 80% silver content from 1920 to 1967.

Rounds

Some hard money enthusiatists use .999 fine silver rounds as a store of value. A cross between bars and coins, silver rounds are produced by a huge array of mints, generally contain an ounce of silver in the shape of a coin but have no status as legal tender. Rounds can be ordered with a custom design stamped on the faces or in random assorted batches.

Certificates

A certificate of ownership can be held by silver investors instead of storing the actual silver bullion. Silver certificates allow investors to buy and sell the security without the hassles associated with the transfer of actual physical silver. The Perth Mint Certificate Program (PMCP) is the only government guaranteed silver certificate program in the world.

Accounts

Most Swiss banks offer silver accounts where silver can be instantly bought or sold just like any foreign currency. Unlike physical silver, the customer does not own the actual metal, but rather has a claim against the bank for a certain quantity of metal. Many digital gold currency providers, such as e-gold and GoldMoney, offer silver as an alternative to gold and work on a similar principle. Other electronic silver accounts include the eLibertyDollar and Phoenix Silver. Silver accounts are backed through unallocated or allocated silver storage.

Exchange-traded funds

Exchange-traded funds (or ETFs) represent a quick and easy way for an investor to gain exposure to the silver price, without the inconvenience of storing physical bars. The silver ETFs are:

• iShares Silver Trust (NYSE: SLV), launched in April 2006 by iShares.
• Central Fund of Canada (TSX: CEF.NV.A, NYSE: CEF) has 45% of its reserves held in silver with the remainder invested in gold.
• In September 2006 ETF Securities launched ETFS Silver (LSE: SLVR) which tracks the DJ-AIG Silver Sub-Index, and later in April 2007 ETFS Physical Silver (LSE: PHAG) which is backed by allocated silver bullion.

Spread betting

Firms such as Cantor Index and IG Index, both from the UK offer the ability to take a bet on the price of silver through what is known as a spread bet.

Derivatives

Derivatives, such as silver futures and options, currently trade on various exchanges around the world. In the U.S., silver futures are primarily traded on COMEX (Commodity Exchange) which is a subsidiary of the New York Mercantile Exchange. In November 2006, the National Commodity and Derivatives Exchange (NCDEX) in India introduced 5 kg silver futures .

Mining companies

These do not represent silver at all, but rather are shares in companies that mine silver. Companies rarely mine silver alone, as normally silver is found within, or alongside, ore containing other metals, such as tin, lead, zinc or copper. Therefore shares are also a base metal investment, rather than solely a silver investment. As with all mining shares, there are many other factors to take into account when evaluating the share price, other than simply the commodity price. Instead of personally selecting individual companies, some investors prefer spreading their risk by investing in precious metal mining mutual funds.

Investing Strategies

There are three important reasons cited by enthusiasts for holding precious metals, especially gold, silver, palladium and platinum, in every investment portfolio: strategic asset allocation, tactical asset allocation and hedging. Strategic asset allocation supposedly helps fully diversify a portfolio by balancing asset classes of different correlations in order to maximize returns and minimize risk. A recent study carried out by Ibbotson Associates suggested that allocating from 7 to 15.7 percent of a portfolio to precious metals results in increased returns and decreased risk. Hedging is a way of offsetting investment risk; the perfect hedge eliminates the possibility of future losses. The old Wall Street saying, "Put 10% of your money in gold and hope it doesn't work", neatly summarizes the hedging attributes of precious metals. And in today's economic climate, there are plenty of risks to hedge against: currency exchange declines, loss of purchasing power, and fat-tail events - sudden unexpected financial crises such as war, terrorism, natural disasters, health pandemics, derivatives accidents, collapse of a major bank or corporation, disruptions of the oil supply, and so on. However, this theory is controversial, as other financial experts from large banks and publications such as Money Magazine suggest you maintain no more than a 1% precious metal allocation in your portfolio. Whatever your financial position, always do your own research before committing significant sums of money to any investment.

Taxation

In many tax regimes, silver does not hold the special position that is often afforded to gold. For example, in the European Union the trading of recognised gold coins and bullion products is VAT exempt, but no such allowance is given to silver. This makes investment in silver coins or bullion less attractive for the private investor, due to the extra premium on purchases represented by the irrecoverable VAT (charged at 17.5% in the United Kingdom, and 19% in Germany, for example).

Other taxes such as capital gains tax may apply for individuals depending on citizenship and if the asset is sold at increased value.

Philatelic Investment

Philatelic Investment, the investment of funds in collectable postage stamps for the purpose of realizing a profit, is a relatively recent phenomenon. Stamp collecting has long had the reputation of being an unprofitable hobby for most beginning collectors; nevertheless, investing in stamps is growing in popularity among more advanced collectors. Rare stamps are among the most portable of tangible investments, and are easy to store. They offer an attractive alternative to art, other collectible investments, and precious metals. In addition, for those wary of investing in single-country mutual funds or individual stocks of developing nations, stamps may provide the advanced collector/investor with a means to profit from their appreciation.

Requisites for the Philatelic Investor

For those interested in investing in stamps (or in any collectible, for that matter), the acquisition of knowledge is the most essential and most valuable investment. Since this endeavor requires a significant outlay in terms of time, although not necessarily money, the prospective philatelic investor is at an advantage if he actually collects stamps, or is a former stamp collector. A stamp investor should have substantial knowledge of classification, condition grading, authentication, handling and storage, stamp dealers, clubs, auctions (including online auctions, such as eBay), and shows, the stamp market, as well as a general knowledge of worldwide stamps and a deeper knowledge of his chosen areas of specialization, among a host of other things too numerous to list. In other words, he should have many years of previous experience as a stamp collector or dealer behind him before embarking on a program of investing in stamps. Philatelic investment is not a game for dilettantes.

Stamps as Commodities

Like all commodities, the value of a stamp is determined by supply and demand. The factors which determine a particular stamp's supply are the stamp's printing quantity and the quantity of stamps destroyed. Since many collectors prefer to collect unused and undamaged stamps, the quantity used and the quantity damaged also affect collectable supply (since what is considered collectable varies). Printing quantities of stamps are not always available, although some stamp catalogues list printing quantities, when they are known. Quantities used, damaged, or destroyed over time are never known. Generally, the printing quantity, if known, is the only reliable information one has. For this reason, a low printing quantity for a stamp can be an attractive feature for the investor to consider.

Demand

Demand for a stamp depends largely on the following factors: the stamp's country (or area) of issuance, topical or thematic appeal, and collectors' or investors' perceptions as to its current or future value. These factors are summarized as follows:

• Country (or area) of issuance: most stamp collectors within any given country collect their country's stamps; for instance, most American collectors collect U.S, most Swiss collectors collect Switzerland, etc. Some collectors collect areas (such as the Netherlands and Colonies, or British Asia) or regions (such as Latin America).

• Topical appeal: many stamp collectors focus on stamps which picture particular popular topics, such as Sports, Nature, Art, Religion, Space Exploration, etc.

• Perceptions of value: these influence demand for stamps in the same way that perceptions influence demand in the stock market. Increasingly, the perceptions of collectors/investors as to a stamp's future value play a part, as well.

Given all of this information, how does the investor make a judgment as to whether to focus on a particular stamp? The main questions that the investor should ask are:

• Which countries or collecting areas will experience an increase in demand over the long term?
• Within these collecting areas and given the available knowledge concerning supply (printing quantities), which stamps are undervalued, and should be targeted for investment?

Two types of trends of increasing demand are relevant to philatelic investing: country/regional trends, and topical demand trends.

Country/regional trends are largely dependent upon economic development. Historically, stamps of countries which have experienced long-term economic growth and an expansion of their middle classes have risen in value accordingly.

Cultural factors

To an extent, however, cultural factors come into play: for various reasons, certain countries have higher proportions of their populations which collect stamps than other countries, although the stamp collecting proportion of a country's population is often very difficult to measure, due to widely varying degrees of dedication to the hobby. Is anyone who ever saves a single stamp a stamp collector? If so, then there are probably about 5 million stamp collectors in the U.S.. If, however, one wishes to account for only "serious" stamp collectors (those spending $150 or more per year on their hobby), there may be only about 200,000. In terms of proportion of the population, this compares unfavorably with most European countries, notably Germany, in which there are probably 1 million to 2 million serious collectors, and perhaps 8 million to 10 million "unserious" collectors.

Since cultural factors are difficult to gauge or project, and demand trends for various topical or thematic categories must be analyzed individually (because they follow no consistent, general pattern), the investor initially should focus on the country (or region) of issue, its prospects for long-term economic development, and growth of a middle class.

Topical categories

Demand trends for various topical categories are based on a wide variety of factors, some of which are demographic, and some of which relate specifically to an individual topical, or group of topicals. An example of a demographic trend which might affect a topical category is a trend toward upward mobility among a particular ethnic or racial group. If, for instance, Polish Americans experienced an upwardly mobile trend, stamps featuring famous Poles or Polish themes might increase in value. Factors which relate individually to topical categories which can influence demand are numerous, and may include: anniversaries, media spectacles (such as blockbuster films), moral crusades, etc. Such factors have a short-term effect, or they may be elements of long-term trends.

An example of such a short-term fluctuation in the demand for a topical category was the brief "boomlet" in Diana, Princess of Wales issues which occurred following the popular British royal's sudden death. For about a year or two after the tragedy, Diana stamps issued by various British Commonwealth nations often sold for up to ten times their catalogue value when offered on eBay. Most of the buyers of these briefly popular issues were not, of course, "serious" stamp collectors. To experienced collectors, the mania for these issues was so obviously driven by the sensationalist popular media that it was clear that the price spike was an overblown, extremely temporary anomaly.

Historical Trends

The lesson from the above examples is obvious. First, find countries which have good prospects for long-term economic growth. Once this task is accomplished, the investor's focus must narrow, in order to determine which stamps within the selected country or countries should be targeted for investment.

Following their defeat in World War II, the economies of both Germany and Japan were in a shambles. Most Germans and Japanese were very poor; consequently, very few could afford to spend money which they needed to survive on collecting stamps, and most of the unused stamps collected from these countries during the postwar period were sold to collectors in other countries and American GIs. As their economies grew, German and Japanese collectors bought back their own stamps, and prices for these early postwar stamps rose dramatically.

In the People's Republic of China, Maoists despised stamp collectors as reactionary counter-revolutionaries, so stamp collecting was illegal in mainland China while Mao was in power. Most stamps collected from the in mainland China during this period were sold overseas to American and European collectors in order to generate foreign exchange, and the printing quantities of some issues were very low (100,000 or fewer). For many years, demand for stamps of the in mainland China was also low, however; most Chinese collectors outside of China weren't collecting them, those inside weren't allowed to, and interest among non-Chinese was minimal. PRC issues were considered "wallpaper." All of this changed after Mao died, the prohibition against stamp collecting was repealed, and Mainland China became more capitalistic. Current estimates of the number of stamp collectors in China range from 10 to 50 million. As always, this is impossible to gauge, but what is clear is that many issues of the PRC, especially some of those issued during the Cultural Revolution period, have risen 10- to 100-fold.

Certain Asian nations, namely the "Asian Tigers", have experienced rapid economic growth in recent decades, along with a corresponding increase in value of their stamps. These include: South Korea, Thailand, Taiwan (the Republic of China), and Singapore; other territories that have experienced similar price appreciation in their stamps are Hong Kong and Macao.

Comparison to normal stamp collecting

Unlike a normal stamp collector, who generally tries to "fill the spaces" in his album, and obtain as many different stamps of the country that he collects as he can afford, the philatelic investor endeavors to find those stamps within his chosen collecting area which will increase in value the most over time. He will frequently be looking for only a few different issues of a particular country, and will buy multiple copies of those issues. If the supply of these targeted stamp issues is small enough, such hoarding by the investor may very well deplete the supply sufficiently in order to accelerate price increases, even without overt attempts to manipulate the market (such as advertised buy lists), by the investor.

Once the investor has selected a country or countries, he must then "hit the books" - researching printing quantities of the various stamps issued by that country, comparing these quantities issued to current catalogue and market values, possibly making guesses as to the proportion of stamps remaining in collectible condition, and assessing the topical (or other) appeal of various issues that he's analyzing.

Illustrative example

This is a complex, arduous, but often interesting and rewarding process. An illustrative example of how such research might proceed is in order:

For various reasons, a philatelic investor might decide that Latin America (Central and South America, and the "Latin West Indies"- Cuba, Dominican Republic, Haiti) will undergo a "democratizing" trend—significantly reforming its corrupt and oligarchical political/economic systems and undergoing accelerated economic development in the coming decades.

He knows that the population base of Latin American stamp collectors is largely derived from two groups—single country and Latin American region collectors within Latin America, and Latin American emigres, most of whom are in the U.S.. Hence, the population bases and economic fortunes of individual countries within the group, while significant, are not of overriding concern.

He focuses on Venezuela, a nation of about 20 million people, immense wealth from oil and other natural resources, and an affluent, educated elite class pretty much riding atop the other 95% of the population. A political and economic situation which is currently problematic, to say the least, but which probably can't get much worse, and which he believes will be more or less resolved for the better in the coming decades.

Thumbing through a Michel South America Catalogue (Michel is a German catalogue firm which produces fine stamp catalogues which frequently list printing quantities for stamps), the investor comes up with a list of Venezuelan issues which have what he believes are low printing quantities in relation to their current catalogue values- in other words, undervalued stamps.

Among others on the list, he finds the following:

Venezuela 1944 World Amateur Baseball Championship Games, Airmail Set (Scott # C189-97)

Printing: 10,000

(Note: since the writer of this article has only a 10-year-old Scott Catalogue on hand, the catalogue value of this set is quoted as $49)

He concludes that this set is probably grossly undervalued, given its very low printing, low catalogue value, projected number of future collectors of Venezuela and Latin America, and the growing popularity of Baseball topicals. He decides to aggressively buy as many of these sets that he can find at a reasonable price. If he manages to accumulate several hundred sets, which is extremely unlikely, he may attempt to overtly stimulate demand by advertising to buy them.

During his research and analysis, the investor may find 10 or 20 Venezuelan issues that he wishes to target in this manner, as well as a number of issues from other Latin American countries. Each country and issue has its own "story," its own set of relevant data, and its own prospects. Will certain Cuban stamp issues appreciate rapidly in value after Castro dies and Havana embraces decadent and hedonistic capitalism again? As soccer becomes more popular worldwide, will a Costa Rican Soccer topical set with a minuscule printing shoot up in value? Such questions are the domain of the philatelic investor, a once rare but increasingly prolific breed of stamp collector.

Vagaries of condition and supply

Postally used stamps

While it is true that, worldwide, most collectors prefer unused stamps, many will also collect used, and some collect used stamps exclusively. Generally, unused stamps of an issue are worth more than the used stamps, and often, considerably more. There are some major exceptions to this rule, however: in some cases, legitimate and contemporary postally used stamps are rarer and more valuable than the same stamps unused. For instance, many stamps issued by Germany during its infamous inflation period are worth far more used than unused, because they could only be used for a short time, after which they became virtually worthless, due to runaway inflation.

Usage rates vary widely from stamp to stamp, and, of course, some stamps purchased by collectors from the post office may be saved for a few years, and then used. Generally, unless a stamp is heavily speculated upon or popularly collected when it is issued, I would estimate that at least 98% will ultimately be used. I differ with the U.S.P.S. on this question; the Postal Service once estimated that 15% of the stamps issued by them are collected, but I disagree with this estimate because I believe that most of those collected for a brief period after issue are eventually be used.

Concerning supply

In many cases, inexpensive stamps increase in value at a greater rate than expensive stamps of the same issue, over time. This paradoxical fact flies in the face of conventional thinking regarding investing in collectibles: that one should try to buy the rarest and most valuable items and hold onto them. There is a logic to such a trend, however: if a stamp is valuable, great care will be taken in handling and storing it, and if it is very valuable, there won't be many collectors who can afford it. If a stamp is inexpensive, however, more will be damaged or destroyed over time, and the high rate of attrition of supply coupled with its affordability to most collectors will contribute to a faster growth in value.

For examples of this, one need only look to some of the early U.S. issues, and compare the catalogue values as multiples of original face values in the low and high values of the set (which have a much lower printing quantity than the low values, and are therefore much scarcer) as follows:

ISSUE/ DENOMINATION............ Scott '01 CV.....CV as multiple of FV

1869 Pictorials -

                 1¢, Unused     700.00          70,000
                2¢, Unused     650.00          32,500
                30¢, Unused  6,500.00          21,666
                90¢, Unused  8,750.00           9,722

1890-93 Definitives -

                     1¢, Unused  27.50           2,750
                    2¢, Unused  22.50           1,125
                      (most common type of 2c)
                    3¢, Unused  72.50           2,416
                    30¢, Unused 325.00          1,083
                    90¢, Unused 500.00            555

1893 Columbians -

                      1¢, Unused  25.00          2,500
                     2¢, Unused  22.50          1,125
                     3¢, Unused  62.50          2,075
                     $4, Unused 3,250.00          812
                     $5, Unused 3,750.00          750

1898 Trans-Mississippi-

                       1¢ Unused    30.00        3,000
                      2¢, Unused   27.50        1,375
                      4¢, Unused  150.00        3,750
                      $1, Unused  1,250.00      1,250
                      $2, Unused  2,100.00      1,050

Damaged stamps

Most collectors endeavor to collect undamaged stamps in the best condition attainable. However, an increasing number are also willing to accept damaged stamps, also known as "seconds." The reasons for this are economic. If a collector wishes to purchase a scarce stamp which has a catalogue value of $2,000, he may expect to pay about 70% to 100% of catalogue value for it if it is in premium condition. If, however, he is willing to accept a VF-appearing example of the same stamp, with a minor defect, he may have to pay only 10%-20% of catalogue value. If he's willing to accept a "space-filler" of the same stamp—an uglier example with a major defect, he may be able to find one for 4%-6%, or less, depending upon how horrible it looks.

The trend toward collector acceptance of seconds implies an unexpected and counter-intuitive prospect, in terms of their investment potential. The value of seconds of scarce and valuable stamps may increase more rapidly than premium examples of the same stamps; in other words, they may prove to be better investments! How, one might ask, could the author make such an apparently insane hypothesis? One example is as follows:

Felix Unger, stamp collector, has $3,000 to invest. He purchases a very nice example of a stamp with a catalogue value of $4,000 (paying 75% of catalogue value), at Royal Hindquarters Stamp Auctions.

His apartment-mate, Oscar Madison, the stamp slob, also has $3,000 hanging around. His dealer-pal, Rip, sells him six VF-appearing but slightly defective examples of the same stamp that Felix bought, for $480 each (12% of Cat. value), and then Oscar uses the remaining $120 in change to take Rip out to a game.

Five years later, the stamp's catalogue value has doubled, to $8,000. Felix and Oscar both decide to sell, because they need the money for alimony.

Since even fewer people can now afford Felix's premium quality stamp than could afford it 5 years ago, he sells it though Royal Hindquarters for 70% of catalogue value, minus commission (about 10%), realizing $ 5,040 ($8,000 CV X 70% = $5,600 -$560= $ 5,040).

Since the increased catalogue value has made the premium quality stamp less attainable, demand for the "second" has risen faster. Oscar dribbles out his six seconds via Ebay at 13% to 17% of catalogue value apiece, averaging 15%, minus Ebay's commission and the cost of lazy Oscar's labor in typing the things up and mailing them- say, 10% commission total. His final take is $6,600 [15% X total catalogue value of $48,000 = $7,200 - 10% commission= $6,480 + $120 in change from orig. purchase, used to take dealer-friend to game]. Oscar's got more money in his pocket than Felix, can annoy Felix with an "I told you so", and Rip is indebted to him for life.

Investment

Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment').

Types of investment

The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

[edit] Business Management

The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). The manager must assess whether the net present value of the investment to the enterprise is positive; the net present value is calculated using the enterprise's marginal cost of capital.

Economics

In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX. I is divided into non-residential investment (such as factories) and residential investment (new houses). "Net" investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year.

Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation measurable at a point in time (say December 31st).

Investment is often modeled as a function of income and interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.

Finance

In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Personal finance

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.

In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.

Real estate

In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.

Residential Real Estate

The most common form of real estate investment as it includes the property purchased as peoples houses. In many cases the Buyer does not have the full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.

Commercial Real Estate

Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50-70%.