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Trade secrets: The future of gold

By Dino Vannicola
Every day, people ask me, “What do you think of the price of gold? Is it going to go higher?” After spending decades running a trading desk, I always give the same answer: “Would I be working here if I knew the answer?”

The fact of the matter is we don’t really know where the price of gold is going on a daily basis. There are far too many variables in a trading day or week that can affect its price. Gold is simply another item in financial trading, which represents a global business pushing through trillions of dollars each day.

Gold as an investment
Precious metals represent a tiny fraction of daily trading activity. On an average day, about 250,000 contracts of gold trade on the Comex, which represents nearly 709 million g (25 million oz), a nominal value of $41 billion. A big number to be sure, but in relation to overall activity, it’s a minor player. Gold represents a special place in the realm of tangible goods, especially jewellery. An investment in a fine piece of jewellery is not only an esthetic purchase, but also a de facto investment in the precious metal. However, there are many more products competing in that space for those investment dollars. The proportion of jewellery sales as a gold investment has been declining steadily over recent years.

This author suspects this trend will continue for the simple reason the high-unit cost of gold makes it harder for the average person to buy a substantial piece without straining their finances. There has also been a steady rise in the number of silver goods to help offset higher gold prices. Silver jewellery is more accessible to a wider swath of buyers.

Keeping stock
The easiest strategy to protect yourself against an adverse price drop in gold and silver is to hedge your prices when purchasing inventory. If you have a commodity trading account with a brokerage company, you can sell a gold futures contract, or 2835 g (100 oz).

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Gold dealers can help with excess inventory you may wish to scrap.
Photo courtesy Dino Vannicola

Typically, you have a cost for the gold component of your inventory when you buy it from a supplier. When the price rises, you have nothing to worry about. Since the 2011 high of $1900, however, we have seen the price drop to a low of $1060.

In a falling market without any price hedges in place, substantial losses on inventory can happen. By hedging your gold price when you buy goods, you remove the risk of a drop in the intrinsic gold value of your inventory.

The purpose of a hedge is to maintain your profit margin regardless of the value of gold. If the price drops, your short contract makes money, which offsets the loss on the gold price of your inventory. If the price goes higher, your inventory rises in value, but your hedge loses. If you can manage your inventory by ordering in 2835-g (100-oz) increments, you can always lock in the effective price of the gold component in your inventory. The labour charge has no intrinsic hedge that can be offset with a financial product. This has to be incorporated into your business plan when pricing jewellery.

Gold dealers can help with excess inventory you may wish to scrap. Many jewellers have a certain level of physical inventory matching their specific size and operational needs.

However, when your inventory grows too large, or you wish to purchase new material, or you simply have to pay bills, selling inventory is an obvious way to mitigate your financial exposure and raise funds.

Most dealers will give you the opportunity to lock in a price and deliver material to be scrapped. The process is fairly straight forward. You deliver material, it gets melted and analyzed, and you are then paid for the gold content. If you are registered with the Canadian Revenue Agency (CRA), then you can also file a claim for a refund on the HST you initially paid when you bought the inventory.

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