Points to consider when investing in gold.
Skip: This is Skip Montreux reporting from Tokyo.
Dez: And this is Dez Morgan coming to you from Southampton on the South Coast of the UK.
Skip: And you are listening to Down to Business English.
Skip: You are no longer in Leeds Dez?
Dez: No, that is me done with Leeds, at least for the time being. I will be teaching at the University here for a few months through the summer though.
Skip: Excellent. It’s so nice to hear that you are finally doing some work.
Dez: Very funny.
Skip: Welcome back everyone to another episode of Down to Business English.
Dez: Yes, welcome back. So Skip life returns to normal once again for another 4 years now that the World Cup has finished.
Skip: I suppose so. But unfortunately, one thing that hasn’t returned to normal and doesn’t look like it is going to any time soon is the world economy.
Dez: Yeah, that is true, enormous national debts, interest rates virtually at zero, housing prices probably set to fall some more. A very difficult time for everyone but especially for investors.
Skip: Where do people invest their money when everything looks so dangerous out there; government bonds?
Dez: That is one option but as interest rates are so low it’s hard to see where the return will come from.
Skip: One option? What are the other options?
Dez: Well I’m very glad you asked me that. It’s the ultimate store of value, a tangible asset class that is inversely correlated to the stock market, timeless in value, currently reaching new all time highs. Any idea what I am talking about Skip?
Skip: A tangible asset that inversely correlates to the stock market. Hmm….Gold?
Dez: That is absolutely correct. Gold. On today’s episode of Down to Business English we’ll be talking about investing in precious metals but especially investing in gold.
Skip: So lets do it. Let’s get D2B; Down to Business with the ins and outs of investing in Gold.
Skip: Before we start talking about the ins and outs of gold investing, I have to ask a very obvious question.
Dez: What’s that?
Skip: I know that gold is a safe investment but what many people don’t quite understand is why is it a safe investment? Unlike other commodities gold has no real use. It’s not a fuel, you can’t eat it, its use in industrial equipment and instruments is not critical. Why has gold, historically speaking, been such a safe investment?
Dez: That’s a very good question Skip. I guess the main reason was throughout history was the rarity value of gold. The price stayed more or less constant until the Spanish found gold in South America and then a whole lot of supply came onto the market at the same time and as you can imagine the price went down rapidly. I suppose gold is money and has a value because we all agree that it does. And so the price is set by how many people want to own it. It’s not tied to any currency nor is it affected by government policies.
Skip: Thank you Dez, I have always wondered about that.
Dez: So Skip, you are from one of the world’s major gold producing countries; Canada.
Skip: Yes, I suppose that is true. But it may come as a surprise to many of our listeners that Canada is not the largest gold producing country. In fact, last year we were only the 7th largest producer of gold.
Dez: Even so, Canada still remains one of the most important gold markets for mining companies. Do you know which country is the largest gold producer?
Skip: As of 2009 the number one gold producing country was; not Canada, not the U.S. nor Australia or Russia.
Dez: It must have been South Africa then. They have a huge mining industry.
Skip: Close. South Africa was in second spot. The largest gold producer last year for the first time ever- was China.
Dez: I didn’t know that. Interesting, but here is a question for you Skip.
Dez: If you wanted to buy some gold what would you do?
Skip: That is easy. I would go and buy some Maple Leaf coins.
Dez: Maybe I should explain that. Every major country produces its own gold bullion coins and the ones that Skip mentioned, the Maple Leaves are the official Canadian coins. Other popular bullion coins are the American Eagles, The South African Krugerrands and The Chinese Pandas. Each coin weighs one ounce and costs whatever the spot price of gold is plus an additional percentage point for minting costs.
Skip: By spot price you mean…
Dez: By spot price I mean the price of gold at the time of purchase. Since gold is a commodity, the price fluctuates over the course of the trading day. The price you pay for gold depends on its current value at the time of the purchase.
Skip: So what was the spot price the last time you checked?
Dez: I knew this was going to come up so I looked just before meeting you on Skype this afternoon and in New York the spot price was US$1193.00
Skip: Hmm… $1193.00 not bad. We should point out that when buying gold coins one should shop around to find the brand that has the lowest additional cost over the price of the gold content. Traditionally that has always been the South African Krugerand and that remains true today with the premium on the Krugerand being about 7-9% over the spot price depending upon how many coins you buy.
Dez: So Skip lets say that you had a lot of money to invest in gold. How would you go about it? Would you just buy a big bag of coins and hide them somewhere at home.
Skip: Actually, I have heard of people doing that but it would be much more cost effective to move up to gold bars as the price over the spot value is considerably lower. And I personally wouldn’t leave anything of that value lying around at home. I would probably get a safety deposit box at the bank.
Dez: That is certainly one option. But another option is you could buy the gold through a bullion dealer and have them store it for you. The Perth Mint in Australia is a popular option or GoldMoney based in London is another.
Skip: Well, being a Canadian, maybe I could buy shares in a small mining company. Share prices have been known to go up hundreds of percent in a very short period of time.
Dez: Yes, but they can also go down to 0%. You are right, if you are willing to do a lot of research and are comfortable with the higher risks then investing in mining company shares is the way to go.
Skip: What exactly does a person need to know before they can start investing and making those hundreds of percent profit.
Dez: Just like you Skip always trying to run before you can walk. Well the first thing you need to think about is the size of the company.
Dez: The major producers are the safest investment as they already have gold mines in production, often in different parts of the world, and are established in the industry.
Skip: I see.
Dez: The upside is lower here as even if a major producer makes a big discovery it won’t add that much to their bottom line. Then their are the mid-tier producers. A little more risky than a major producer but with the possibility to rise more if they make a discovery or are bought out by a major.
Skip: Alright, let’s cut to the chase. Which investment will make me hundreds of percent profit in a matter of weeks?
Dez: Hold on, I’m getting there. Junior producers, small companies that have one or two mines in production, can go through the roof if they discover gold on a property as this could double or even triple the amount of reserves the company has. Similarly of course, if they encounter any problems then a large part of their production could go off line. That would cause share prices to plunge.
Skip: What sort of problems could they run into?
Dez: There are many pitfalls. A mine could flood, or there could be some political problem, there could be a problem getting government permission to dig, the list just goes on. But if all goes well then a lot of money can be made. However, there’s another level of company that can go up thousands of percent.
Skip: Now that sounds like the company for me. Please tell me more.
Dez: Okay, these outfits are called junior exploration companies. They dont actually produce any gold but rather only go out drilling in the hope that they’ll find something. If they do, then the profits can be outstanding.
Skip: When they discover a new source of gold, what do they do? Sell the rights to a gold production company?
Dez: Yeah, that is what they often do or some borrow money and mine it themselves. But please remember that most of them go bankrupt and you need to think about that carefully.
Skip: So really I would probably be better off buying a selection of gold companies to give me a bit of safety but also some of the incredible upside of the juniors.
Dez: That’s true and probably the best way to do that is to buy a managed mutual fund made up of mining companies to give you some diversity.
Skip: Well thank you Dez. I certainly feel as if I know a lot more about investing in gold and shares in gold mining companies. But now, why don’t you and I get D2V… Down to Vocabulary.
Dez: The first word, or set of words we should talk about today are to invest, an investor, and an investment. The verb to invest in the way its used in today’s story means to buy something in the hopes that its value will, over time, increase and thus be more valuable in the future. An investor is a person who performs this act, and the noun an investment is the thing or profit making activity.
Skip: For example, back in 2008 when stock prices were at all time lows I, Skip Montreux, invested a small amount of money in the Japanese heavy machine company Komatsu. It was my first time being an investor. I purchased the stock at around ¥1200/share.
Dez: And how is that investment doing today, two years later?
Skip: I sold out back in April when it reached ¥2000 a share. Today it stands just above ¥1700 a share. I guess I didn’t do so bad as a first time investor.
Dez: Well done. Money isn’t the only thing a person can invest either. You can invest your time or invest your energy in something as well.
Skip: That’s right. Recently, I have been investing more of my time and energy into studying Japanese. I’m paying a teacher to spend time with me on a weekly basis and I’m trying to review my notes everyday.
Dez: Really?! Is it paying off?
Skip: A little, but I really do need to start investing even more time in order to see bigger improvements.
Dez: Good luck with that. What’s the next word?
Skip: The next word is tangible. In the story Dez referred to gold as a tangible asset. Literally, something that is tangible is something you can physically touch. Unlike a stock in a company which has no real physical value or at the very least its value is tied to the percieved value of the company, gold on the otherhand is in itself worth something. It is tangible. This word is also quite commonly used idiomatically, referring to something that can be clearly observed.
Dez: For example?
Skip: Well for example, after almost 3 months of trying to stop the oil leak in the Gulf of Mexico with no real progress, BP over the weekend, successfully put a new containment cap in place. So far, it has produced a tangible result as for now, the leak has been completely stopped.
Dez: Let’s hope so. Here’s another example. This summer I am working with a group of students from China who are hoping to study management here in the UK. By the end of the course we need to acheive tangible results. Specifically, they must all attain a score equivelent to a 6.5 on the IELTS test.
Skip: Is that doable?
Dez: Yes, I think it is. Next I would like to deal with the phrase to be inversely correlated. This is a very common phrase used when talking about commodities and stock markets. Let me break it down a bit for you. The word inverse means to be the mirror opposite of something. Just imagine the negative of a photo when you are using a camera
Skip: I hope are listeners are old enough to remember film cameras.
Dez: If not I’m sure they can google up on it. The photo negative was the inverse image of the actual photo. So white areas appeared black and black areas appeared white.
Skip: hat’s a very good analogy. If you have no idea what Dez is talking about, most digital cameras today have an inverse filter on them. Take a picture and apply that filter and you will see what he means.
Dez: That’s an idea. So inverse basically means to be a direct opposite. And the word correlate means that 2 things have a direct effect on each other. So in the story when I said gold was inversely correlated to the stock market I was simply saying that when markets go down, gold tends to go up. When markets go up, gold tends to go down. Do you have another example Skip?
Skip: Sure, the medical community has clearly established that there is a strong correlation between a persons health and whether or not they smoke. For this reason, it is typically more expensive to buy life insurance if you are a smoker. The premium for a smoker is at times up to 40% higher than a non smoker.
Dez: Yet another excellent reason for you to quit Skip.
Skip: Oh and those reasons just keep adding up.
Dez: What’s our next keyword?
Skip: Next up is the phrase cost effective. This adverbial phrase describes something that is the least expensive way to produce or do something. Something that is not cost effective is a waste of money. Dez can you give us an example?
Dez: I sure can. Two years ago Boeing launched their Dreamliner 787. It’s built out of ultra light composite metals and uses the very latest areodynamic design principles. They boasted that it would be the most cost effective aircraft ever manufactured. Unfortunately though, they have been plauged with production problems and have yet to deliver one to their waiting customers.
Skip: I understand they are just now in the last stages of certification testing. I look forward to seeing one of these Dreamliners in action someday soon. Here’s another example; Down to Business English is a cost effective way for you to improve your English listening ability. All our podcasts and pdf audioscrits are available for no cost. You only need to invest your time in studying them thoroughly.
Dez: It is at that. Moving on, next I have to fluctuate which communicates that something, usually the price, is quickly rising, then falling, and then rising again. If something is fluctuating, it doesn’t stay at the same price for very long. The opposite of to fluctuate is to remain stable.
Skip: Right now is the summer season and that means it is peak season for holiday air travel. As a result, the price of an airline ticket from Japan to Canada fluctuates drastically between the middle of July and the end of August. A ticket that sells for ¥80,000 in July goes for ¥170,000 in August, and will drop back down to ¥80,000 in September.
Dez: That is quite a drastic swing. Another example; one of the biggest challenges any manufacturer faces is anticipating or predicting fluctuations in customer demand. If a company guesses wrong, they either have too much or too little product in the supply chain.
Skip: Good example. Next on our list is the idiom, cut to the chase. Now I really like using this expression as it means, let’s get right to the point of the issue. This expression comes from Hollywood actually. Many Hollywood movies, usually near the end of the story, have a good old-fashioned car chase scene in them. If you tell someone that you want to cut to the chase, what you are saying is you want to skip over all the boring details and jump straight into the action of the chase scene.
Dez: And that pretty much explains itself I think. My next word is plunge. This is a common verb used when describing market performance. When a stock loses a lot of value in a very short time, you can say that its price plunged. It’s the same verb we would use to communicate someone jumping off a sharp cliff into the ocean. They plunged into the sea.
Skip: An example is the housing market in the United States last year. After the effects of the the sub prime market took hold on the economy, housing prices across the country plunged, forcing many people to go into bankruptcy.
Dez: And they really have yet to recover. My next word is the noun pitfall. A pitfall is an unexpected danger that you encounter. You may be expecting problems when you set out on a business venture but you don’t know what exactly they will be until you encounter them. There are many pitfalls in business and a successful business person is one who is lucky enough to miss as many of them as possible.
Skip: Apple has recently had a pitfall with the release of their iPhone 4. Almost immediately after introducing the phone into the marketplace, reports of faulty reception began coming in. It took them some time to respond to the issue largely because they were not expecting to face this particular pitfall.
Dez: I understand that antenna reception is a common pitfall facing any mobile phone manufacturer.
Skip: That’s true, but Apple really mishandled the PR angle on this and are now licking their wounds a bit. But I’m sure they will survive.
Dez: I’m sure they will.
Skip: Okay, our final word today is diversity. Diversity is a noun that describes the quality of having many differences. In terms of investing, to have a diversity of stock means you hold shares in a wide range of companies from different sectors of the economy.
Dez: There is much less risk when you diversify your investments because when one particular stock is performing badly, the others may be doing well.
Skip: One reason Japan’s economy is doing so poorly is that it is not a very diverse economy. Primarily it is focused on manufacturing and technology. Canada’s economy on the other hand is still quite strong becuase it is a much more diverse economy. There is the manufacturing sector, the resource sector, the agriculture sector, and not to mention the tourism sector.
Dez: Wow, you are sounding really homesick.
Skip: Hmm…perhaps. Well, that is all the time we have for vocabulary today. Please go back and listen to the story one more time and catch all of those words in action.
Dez: That brings us to the end of today’s show. We hope you’ve enjoyed this topic.
Skip: Be sure to visit the website at www.downtobusinessenglish.com and download a complimentary audioscript to help you in your studies.
Dez: And everyone, please, DON’T forget to enter our Tell 2 friends and win an iPod Touch contest.
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Dez: You can find me on Twitter at www.twitter.com/DezMorgan. That’s a capital D and a capital M.
Skip: Yes, and my Twitter handle is www.twitter.com/skipmontreux That’s one word s-k-i-p-m-o-n-t-r-e-u-x.
Dez: And if you are not a fan of Twitter or Facebook and would prefer to email us, it’s firstname.lastname@example.org
Skip: Remember, for each way you let us know that you have told 2 friends, your name will be entered into a draw for a 8 gigabyte iPod Touch. The contest is open until the end of August and the draw will take place in the first week of September.
Dez: A pretty cost effective way of getting your hands on an iTouch.
Skip: Thanks everyone, see you next time.
Dez: Yes, thank you. Bye bye.