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Investments Diversification Remains Key to Weathering the Economic Storm

Commodities / Gold & Silver Dec 12, 2008 - 03:57 PM GMT

By: Mark_OByrne

Commodities Best Financial Markets Analysis ArticleWith the economic slowdown and the consequent fall in jewellery sales, jewellers have recently begun touting the merits of jewellery and diamonds as being “investments”. Gold, silver, platinum or palladium rings, bracelets, necklaces and diamonds or other gemstones should not be sold as an investment and it is irresponsible to sell them as such.

This is dangerous nonsense that may lose investors even more of their hard earned savings.

Firstly, jewellery and diamonds attract VAT at very high levels. Investment grade gold bullion (0.9999 or 24 carat) coins, bars or government gold certificates are stamp duty and VAT free due to the EU Gold Directive.

Gold bullion coins, bars and certificates can be put in a pension fund unlike diamonds and jewellery which is another reason that they are not “investments”.

Another important consideration is that the jewellery market is known for having huge mark-ups over the actual gold content or intrinsic precious metal value of the jewellery itself. Which means that standard, run of the mill 9 carat, 14 carat and 22 carat rings, bracelets and necklaces have mark-ups of hundreds of percent over the precious metal content value.

This means that a very large necklace that has 1 ounce of pure gold (0.9999 pure or 24 carat) contained in it will normally cost well in access of 250% over the market price for gold. Thus, for example if the price of gold is trading at €600/oz or £550/oz, the necklace may cost well in access of €2,100/oz or £1,375/oz. A gold bar which also has 1 ounce of pure gold in it will cost €600/oz or £550/oz plus a much smaller mark-up of some 5% or €630 or £577.50.

This is just on the buy side. As important, is the sell side consideration. When an owner of jewellery goes to sell their “investment” they will be lucky to realise 30% of the cost price of the jewellery item. In fact most jewellers will not even consider buying the piece back and the buyer will be forced to sell it at a massively discounted price in a pawnshop or on eBay.

This massive instant depreciation is not seen in asset markets including the gold market itself.

A gold certificate or gold bars can be bought at 2% to 6% over the live market gold price. A day, week, month, year or years later the same gold certificate or gold bars will be automatically bought back by a bullion broker or government mint at near 100% of the market value – at some 1% below the actual market price or even slightly above the market price.

This means that the spread between the buy and the sell price for investment grade gold bullion is in the low single digits and is tiny whereas the spread between the buy and sell price for rare stones or jewellery is extremely high making any sort of investment return nigh impossible.

There is no local or international jewellery or diamond marketplace where jewellery or rare stones are traded on a daily basis on an exchange as there is with equities, commodities, bonds, currencies and gold. Therefore there is no efficient market or price discovery mechanism which means that the price of jewellery and rare stones is subjective and subject to the whims of individual jewellers and valuers.

Even international experts in the trade itself deny that jewellery or gemstones are investments and deny that they are not correlated with equity markets and therefore “rock solid investments”. Lisa Hubbard, executive director of International Jewelry at Sotheby’s notes that " Diamonds tend to go up and down with the value of the stock market.“

Unlike, jewellery and rare stones, investment grade gold bullion (0.9999 pure) does have an inverse correlation to property and equity markets as was seen in the 1930’s and 1970’s and in recent months.

Jewellery and rare stones are not investments. Some quality jewellery pieces and top quality very rare stones may be stores of value and retain their value in the event of a continuing and deep recession however the vast majority of jewellery pieces and rare stones will fall in value. As the expert from Sotheby’s noted diamonds are correlated with equity markets as are the art and wine market. Sotheby’s own share price has fallen from nearly $60 to $10 per share today.

In the current unprecedented financial and economic climate there are very few safe havens, but gold bullion remains one. Central bank gold sales and leasing of gold have artificially suppressed the price of gold in recent years but with gold lease rates surging and central banks concerned about financial, economic and systemic contagion, this source of supply is set to dwindle in the coming months. Indeed many South American, Middle Eastern, Asian (including the Chinese) and the Russian central bank have already stated their intentions to and are adding to their gold reserves.

The German Bundesbank recently clearly stated how they view gold as an essential monetary asset. "National gold reserves have a confidence and stability-building function for the single currency in a monetary union," the Bundesbank said. The wise sages in the Bundesbank said that financial and political uncertainty make their gold reserves even more important than before. The Bundesbank is the world's second-largest holder of gold after the US Federal Reserve, and has sold just 20 tonnes out of total reserves of over 3,000 tonnes in the past five years.

This Christmas, buy jewellery or a diamond as a beautiful gift for a loved one not as an ‘investment ‘ that will protect you from the global economic recession.

As ever real diversification and real diversification in pension funds is absolutely essential to all investors and best of breed equities, property, commodities, government bonds, cash and gold bullion should be included in all investors portfolios in order to protect ourselves in 2009.

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ph +353 1 6325010
Fax  +353 1 6619664
Gold and Silver Investments Limited
No. 1 Cornhill
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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