The Beginner’s Guide to Precious Metals XAU XAG

XPT CPR

CPR Gold/US Dollar SELL XPD

XPD

BUY

Silver/US Dollar Copper/US Dollar

SELL

BUY

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Platinum / US Dollar

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Content Introduction_________________________________________________________________________ 1 Revisiting the gold standard _________________________________________________________ 2 Modern uses of precious metals_____________________________________________________ 3 What influences prices? _____________________________________________________________ 4 Investing in precious metals _________________________________________________________ 7 Ready to trade______________________________________________________________________10

Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).

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Introduction Precious metals have a long and storied history not just as a financial instrument, but as a means of exchange. Long before government-issued currencies existed, civilizations relied on a bartering system to obtain what they needed. As the bartering system evolved, merchants and consumers began to rely on precious metals such as gold and silver to complete their transactions. As a result, precious metals emerged as a medium of exchange thousands of years ago to perform the function of money that would eventually form the basis of commerce.1 Precious metals are the only stores of value that have withstood the test of time, surviving 6,000 of years of human civilization.2 Since the dawn of time, societies have valued gold and silver as legitimate forms of payment. Today, precious metals not only represent value, but are investment grade assets that can hedge against global volatility and financial uncertainty. For this reason, they play an effective role in any savvy investor’s portfolio.

PRECIOUS METALS DEFINED

By definition, a precious metal is a scarce and earth-rare commodity that has been historically valued by societies as a currency or other form of payment. In modern times, precious metals are valued for their investment potential, industrial application or commercial appeal (i.e. jewellery and silverware). The most common types of precious metals include gold, silver, palladium, platinum and rhodium.

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Paul Mladjenovic. Mining the History of Precious Metals. Precious Metals for Dummies. Edi Prior (April 1, 2013). “How much gold is there in the world?” BBC News.

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Revisiting the gold standard

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In order to understand the role of precious metals

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in today’s financial system, it’s important to revisit a period known as the gold standard. The gold standard was an economic system implemented by the United States from 1882 to 1932. It established a process by which the value of a national currency was defined in terms of gold,

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for which the currency could be readily exchanged. Countries used the gold standard to regulate the size and growth rate of their money supply, a function that is now carried out by central banks.3 The gold standard period was marked by significant economic growth and relatively free trade in terms of goods, labour and capital. It also helped shape the United States into a global economic powerhouse.4

PARTICIPATING COUNTRIES FIXED THE VALUE OF THEIR CURRENCIES TO GOLD

Unfortunately, the gold standard fell apart during World War I. It was briefly reinstated from 1925 to 1931 in a period referred to as the Gold Exchange Standard, which allowed countries to hold gold or dollars or British pounds as reserves, except for the United States and Britain. After Britain’s departure from this system in 1931, the United States would nationalize gold under President Franklin D. Roosevelt, eventually paving the way for the Bretton Woods system in 1946. Under Bretton Woods, global currencies were pegged to the US dollar as an international reserve currency. To prove its credibility, the US government agreed to exchange dollars for gold at a fixed price.5 This system would last until 1971, when US President Richard Nixon famously suspended the ability to convert dollars into gold.6 This marked the end of the Bretton Woods era. It also marked the beginning of the floating exchange rate system, where the value of a country’s currency would be determined by the forces of supply and demand in the foreign exchange (i.e. forex) market.7

Michael D. Bordo. The Concise Encyclopedia of Economics: Gold Standard. Library of Economics and Liberty. Matthew Hodel (January 4, 2013). Precious Metals in Society. 5 Financial Times. Definition of Bretton Woods. 6 International Monetary Fund. The end of the Bretton Woods System (1972-81). 7 Investopedia. Floating Exchange Rate. 3 4

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Modern uses of precious metals While currencies have largely replaced precious metals as a form of money, items such as gold have retained their monetary value. Today, gold bullion is exchangeable, interchangeable, standardized and priced by the forces of supply and demand in the market. Having said that, precious metals have a wide variety of uses in the 21st century. • Jewellery and Silverware Precious metals such as gold and silver also play an important role in the jewellery and silverware industry, which generates annual global sales of €148 billion. This figure is expected to grow between 5% and 6% until 2020, suggesting that consumer demand will continue to play a leading role in how

SILVER IS USED IN PHOTO VOLTAIC CELLS

precious metals are valued.8 • Industrial Development Precious metals may be shiny and beautiful, but they also contain high electrical conductivity and chemical properties that make them resistant to corrosion. This makes them highly sought after by the industrial sector in the development of consumer goods and other highly specialized applications. For example, gold’s physical and chemical properties make it highly sought after by the electronics and dentistry industries, which together account for more than three-quarters of the yellow metal’s industrial application.9 Gold and other precious metals can be found in everything from computer keyboard circuits to mobile phones. Copper is another popular metal (although not a precious metal) that is used mainly in building construction, electronics products, transportation equipment and consumer and general products.10 • Central Bank Reserve Asset Central banks like the Federal Reserve, Bank of England, Bank of Japan and others are key players in the precious metals market, especially gold. Central banks maintain what is called a gold reserve, which is intended as a store of value enabling national governments to settle international transactions.11 As of October 2015, the United States was by far the largest holder of gold. Its central bank, the Federal Reserve, held approximately 8,133.5 metric tonnes of gold,

Linda Dauriz, Nathalie Remy and Thomas Tochtermann (2013). A multifaceted future: The jewelry industry in 2020. McKinsey & Company. Ashok Damarupurshad (December 2005). The Precious Metals Trade – General Information Handbook. Infomine. 10 Geology.com. Facts About Copper. 11 Encyclopaedia Britannica. Gold reserve 8 9

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representing nearly three quarters of the country’s total reserves.12 Germany was a distant second at 3,381 metric tonnes, or 68% of the country’s total reserves.13 • Investment and Speculation It’s not surprising that precious metals are among the world’s most actively traded commodities with Gold being the most actively traded precious metal, followed by silver, platinum, palladium and rhodium.14 The next sections provide a detailed breakdown of the ways investors and speculators trade precious metals on the open market.

What influences prices? One of your main motivations for investing in precious metals might be the incredible price collapse the market has witnessed over the past three years. Consider that gold prices reached an all-time high of $1,913.50 per troy ounce on August 23, 2011.15 After rising for 12 consecutive years through 2012,16 gold prices have declined in each of the last three years, losing more than 36% in the process. As one might imagine, there are several factors that could influence the price of gold and other precious metals. Things like supply-demand imbalances, price manipulation, central bank action and currency volatility are just some of the reasons why precious metals prices fluctuate on the open market. • Supply and Demand In the financial markets, the forces of supply and demand play a big role in price fluctuations. This is no different for precious metals. Take for example the fact that precious metals are a finite resource whose output will likely never keep pace with demand. At the same time, demand for precious metals such as gold is rising at a significant rate, especially for jewellery and investment. Investment-grade gold rose 27% year-over-year in the third quarter of 2015, with physical coin investing rising 111%. Gold demand as a whole rose 8% year-over-year.17 At the same time, the supply of gold from mine production declined by 1% in the third quarter after a long period of growth, suggesting that lower prices may be taking their toll on producers. Having said that, gold is mainly driven by investor sentiment instead of the laws of supply and demand. That’s because new mine supply is outweighed by above-ground hoarded gold. This World Gold Council. Latest World Official Gold Reserves. Statista. Gold reserves of largest gold holding countries worldwide as of October 2015 (in metric tons). 14 Emad Qureshi (April 9, 2015). “Top 5 Most Traded Precious Metals.” Money & Matters. 15 Glenys Sim (August 25, 2011). “Gold Drops for Third Day After Margin Boost as Equities Advance.” Bloomberg Business. 16 Onlygold.com. Historical Gold Prices: Over 200 years of historical annual Gold Prices. 17 World Gold Council (2015). Gold Demand Trends: Third quarter 2015. 12 13

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puts gold prices at the mercy of those hoarding it; if they

IN CASE OF EMERGENCY

decide to sell, the price drops. If they decide to buy, they end up hoarding the new supply, thereby pushing prices higher.18 Due to its significant industrial usage, silver is much more influenced by the forces of supply and demand than gold. Much of this can be attributed to the surge in demand for electrical appliances, medical products and superconductor applications around the world.19

BUY GOLD

• Global Financial Crisis 2016 started with a bang, with global stock markets registering their worst two-week start to a year on record.20 Key markets in China, Japan and Europe entered into bear market territory amid growing concerns about weak global growth, deflation and plunging oil prices. As a result, even bearish gold prices rallied, as investors sought to escape global

IN TIMES OF CRISIS, GOLD IS BOUGHT AS A SAFE HAVEN

volatility. In general, gold prices tend to rise during periods of economic or financial uncertainty. For that reason, gold is often referred to as a crisis commodity.21 Similar trends can also be observed for silver and platinum. When investors are jittery, they often park their money in precious metals. • Inflation and Currency Devaluation Gold and other precious metals not only protect against perceived volatility, they are also used as a hedge against inflation and currency devaluation. The idea here is that gold holds value outside of political forces, which makes it a solid investment during periods of currency volatility. That’s why many investors choose to load up on precious metals when they believe the value of their currency will decline. On the flipside, gold and the US dollar have a clearly identified inverse relationship. This means that gold rises when the dollar is weak and vice versa. That’s because a stronger dollar makes dollar-denominated gold more expensive for foreign buyers. A stronger dollar is also associated with higher US interest rates, which raise the opportunity cost of holding non-yielding assets, such as gold, silver and other precious metals.22

Aryeh Katz (October 31, 2008). “A Beginner’s Guide To Precious Metals.” Investopedia. Aryeh Katz (October 31, 2008). “A Beginner’s Guide To Precious Metals.” Investopedia. 20 Sam, The Trading God (January 18, 2016). “US Stock Futures End Lower amid Global Volatility.” TradingGods.net 21 Scottsdale Bullion & Coin. How These 10 Factors Regularly Influence Gold 22 Reuters (November 23, 2015). “PRECIOUS-Gold drops towards 6-year low on dollar, US rate hike view.” Reuters. 18 19

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• Governments and Central Banks As you’ll see a little bit later, central banks hold large gold reserves, making them key players in the precious metals market. The same forces of supply and demand apply here; when central banks buy more gold than they sell, the supply of currency increases while available gold become scarcer. This drives the value of gold higher.

CENTRAL BANKS HOLD LARGE GOLD RESERVES At the same time, central banks can be a great source of instability. The past eight years have been a prime example of this. Record low interest rates, quantitative easing and other forms of monetary policy tend to push investors into the safety of precious metals, especially as the value of national currencies weaken.23

METALS TRADING WITH EASYMARKETS Trade metals easily as day (spot) trades on the easyMarkets platform. Gold may also be traded as an option.

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Metal (symbol)

Trading Pairs

Gold (XAU)

USD / EUR / GBP / JPY / CHF / AUD / NZD / CAD / XAG / SGD / RUB

Silver (XAG)

USD / EUR / GBP / JPY / CHF / AUD / NZD / CAD / XAU / SGD / RUB

Platinum (XPT)

USD / RUB

Palladium (XPD)

USD / RUB

Copper (CPR)

USD

Scottsdale Bullion & Coin. How These 10 Factors Regularly Influence Gold.

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Investing in precious metals Investors looking to gain exposure to precious metals have many ways of doing so. In addition to outright physical ownership, Over the Counter (OTC) trading is considered to be one of the most popular ways to buy and sell precious metals. The OTC market operates 24 hours a day around the globe, with main dealings in London, New York and Zurich. The OTC precious metals market is massive, consisting of central banks, miners, jewellery fabricators, industrial producers and investors.24 Luckily, the growth and widespread adoption of online trading platforms has made all forms of precious metals investing accessible like never before. Whether you’re trading futures, options or CFDs, most of these services can be found on online financial trading platforms or through the investment arm of your personal bank. Even if you’re interested in buying and holding physical precious metals, you can normally source the product, open a safety deposit box and store your bullion with a few clicks of the mouse.

MOST POPULAR PRECIOUS METALS Gold: A yellow precious metal used for jewellery, industrial production and to guarantee the value of a currency. Silver: A grey precious metal used in jewelry, coins, electronics and other industrial functions due to its high degree of electrical conductivity. Platinum: This silvery-white metal is the strongest precious metal; its supply is very limited, which makes it the most expensive. Palladium: An important grey-white component in electronic and other industrial products, especially in new technologies such as fuel cells. Rhodium: A silvery-white metal that is used for industrial and manufacturing processes due to its durable corrosionresisting coating.

• Physical Bullion and Coins As you can imagine, physical ownership of gold or silver entails owning bullion bars or coins that can be stored in a private vault either at a bank, offshore storage facility or in your own home and office. If you decide to hold physical bullion in a private vault, it’s important to bear in mind the difference between allocated storage and pooled storage. Allocated storage essentially means that the physical bar or coin you purchase is the same one you get back when you decide to retake possession. On the other hand, by holding your bullion in a pooled or unallocated storage facility, you essentially become a creditor that is “owed” the commodity. In this sense, you don’t actually own the bullion outright.25 • Futures, Options and CFDs The futures market, which enables the buying and selling of a financial asset at a predetermined future date and price,26 is one of the best ways to make big money in precious metals. This market Ashok Damarupurshad (December 2005). The Precious Metals Trade – General Information Handbook. Infomine. Byzantium. 5 Reasons to Trust Byzantium With Your Offshore Gold Storage. 26 Investopedia. Futures. 24 25

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is highly liquid and offers tremendous opportunities for investors looking for a big stake in gold, silver and other metals.27 Options are a form of financial derivative that represent a contract sold by one party (i.e. the options writer) to another (i.e. the options holder). Options offer the buyer the right, but not the obligation, to buy (call) or sell (put) a precious metal at the agreed-upon price during a certain period of time also known as the exercise date.28 easyMarkets offers options, which are standard call (i.e. buy) or put (i.e. sell) options that are exchanged on the open market. Options provide the added benefits of no rolling fees, a wide variety of precious metals to choose from and the ability to profit from rising as well as falling market trends.

CFDS ARE POPULAR FOR THEIR SIMPLICITY, EASE OF ACCESS AND FLEXIBILITY

Contracts for Difference (CFDs) are another way traders can access the precious metals market without actually owning the underlying asset. CFDs are similar to options in that they allow traders to capitalize on both rising and falling prices. CFDs and options are also similar in that they offer extensive leverage opportunity and minimal capital requirements. However, unlike options, which are rights to purchase a financial asset at a later time and at a set price, CFDs are agreements to close out a contract for the profit (or loss) in the difference between the opening price and closing price of an asset.29 Additionally, a CFD may be seen as a more accurate reflection of the underlying asset because its price isn’t influenced by things like volatility, contract expiry (i.e. time limit), interest rates and other supply/demand considerations.30 To learn more about how you can access precious metals futures, options and CFDs, check out the easyMarkets Metals page. • Certificates If you want to enjoy the benefits of physical gold or silver ownership without the hassle of transportation, storage and the fees that go along with them, certificates might be an excellent choice. A gold certificate is basically a physical document that entitles the investor to a specified value of gold. However, it’s important to keep in mind that certificates don’t offer insurance in the case of a real disaster.31 Aryeh Katz (October 31, 2008). “A Beginner’s Guide To Precious Metals.” Investopedia. Investopedia. Option. 29 CFDSpy. CFDs vs. Options. 30 Contracts-for-difference.com. Trade CFDs or Options. 27 28

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• Common Stocks and Mutual Funds One of the more innovative ways to gain exposure to precious metals is by purchasing shares of gold and silver miners. Although gold mining stocks offer more growth potential compared to owning physical gold, they face the same challenges as other equities. This is amplified by the fact that very few people – even those investing in precious metals – know the ins and outs of the gold mining industry. If you’re looking to diversify in precious metals in order to hedge against inflation or other economic risks, investing in mining stocks probably isn’t the way to go.32 • Commodity or Gold ETFs Gold exchange traded funds (ETF) are an easy way to invest in precious metals without the hassle of physical ownership. The first gold ETF to appear on the market was Gold Bullion Securities (GOLD), which was made available on the Australian Stock Exchange in 2003. Today, investors have access to a large variety of gold ETFs, which are commonly referred to as GETFs.33 One of the main benefits of owning gold ETFs is the ability to diversify your portfolio with precious metals easily and seamlessly. Because ETFs trade like a stock, they can be bought on margin and sold short, allowing you to profit from a wide variety of market conditions.34

Benefits of holding precious metals With so many investment vehicles to choose from, precious metals have never been more accessible than they are today. Whether you choose futures contracts or their physical equivalent, the benefits of precious metals can be numerous. • Hedge Against Inflation It has been stated many times, but holding precious metals may safeguard against out-of-control inflation, which refers to the decline in the purchasing value of money due to rising prices.35 Precious metals like gold and platinum aren’t affected by inflation, so they maintain their value and might even rise in this environment. That’s why purchasing precious metals is considered ideal when trying to preserve your savings during periods of inflation or recession.36 • Universal Value Not only have precious metals withstood the test of time, they possess recognizable value around the world, even after the gold standard was abolished. Despite losing much of its value in recent years, gold is still considered a global currency that is accepted everywhere.

Focus on the User. Gold Mining Stocks vs. Physical Gold. Money-zine. Gold Mutual Funds. 34 Peter Cherewyk. “Advantages And Disadvantages Of ETFs.” Investopedia 35 Investopedia. Inflation. 36 Before Its News (March 29, 2013). Major Benefits of Investing in Precious metals. 32 33

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• Maintains and Increases in Value That precious metals maintain their value and even rise over time might be difficult to see in in recent times with gold prices hovering at record lows. Long-term, however, gold prices have always made solid investments precisely because they maintain their value during periods of economic and financial duress and continue to appreciate throughout the ages. • Ease of Access The previous section demonstrated just how easy it is to gain exposure to precious metals. CFDs, futures and options all provide many possible ways to diversify your portfolio with precious metals.

PRECIOUS METALS ARE ALWAYS IN HIGH DEMAND

• Very Marketable Whether you believe prices will rebound or continue stagnating, you can’t deny the marketability of precious metals like gold, silver and platinum. These assets are in high demand all the time, which means you can always find sellers in the event you want to unload your asset. There may be a few exceptions in the case of bullion bars, but in general, precious metals boast high liquidity and marketability in any market.37

Ready to trade Whether you consider them a safe haven, a hedge against inflation or an attractive way to diversify, precious metals are highly liquid and marketable assets that make a great addition to any investment portfolio. The availability of online trading platforms has made entry into precious metals easier and more exciting than ever before. The easyMarkets CFD Metals Trading platform provides immediate online access to the global metals exchange, allowing you to quickly respond to changing market dynamics and build a well-balanced portfolio consisting of gold, silver, platinum and other metals. Contracts are available from as little as 50 troy ounces and can be accessed immediately. In an age of high volatility, expansive monetary policies and global uncertainty, precious metals are an important investment vehicle that traders may consider.

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Bio Stop Pro. 7 Advantages of Precious Metals Investment.

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Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).

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