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3 things every gold investor should know

Gold mining companies still have a long way to go to recover from the significant falls of 2013. Newcrest Mining Limited (ASX: NCM) shares for example are still down 50% on 12 months ago, while shares in Kingsgate Consolidated Limited (ASX: KCN) and Silver Lake Resources Limited (ASX: SLR) are down 65% and 72% respectively.

However before jumping in and buying shares in gold miners, here are three things every gold investor should know:

1. The price of gold is probably manipulated

First it was LIBOR rates and oil prices, now researchers believe the price of gold has also been subject to long-term manipulation.

The gold price we see is based on the ‘London gold fix’ which acts as a benchmark, but it is composed of five big international banks: Barclays, Deutsche Bank, HSBC, Scotiabank and Societe Generale.

According to Bloomberg, each day at 3pm these banks get together on a private conference call and set the ‘afternoon fix’, which researchers believe has resulted in signs of manipulation and collusion over the last ten years.

2. China is likely to drive demand for gold in 2014

The World Gold Council’s latest Gold Demand Trends update reports that consumer demand in China rose 32% in 2013 to a record level of 1,066 tonnes, more than one third of total production.

With worries of an oversupplied Chinese property market built on cheap credit there is increasing talk of Chinese consumers buying gold as a way to store their wealth in case of economic strife and the country is likely to lead the way in demand again in 2014.

3. Gold reserves can drop along with prices

Lower gold prices can make low grade deposits of gold uneconomic to mine and process, resulting in a company lowering its reserve estimates.

Last month Newcrest Mining announced a reduction to its estimated gold reserves by 11% (around 9 million ounces), after the company removed marginal ore deposits from its estimates. Gold reserves are now estimated to be 78 million ounces.

Foolish takeaway

The gold industry is unique amongst almost all others in terms of demand, supply and pricing. It is important to be aware of as many of these characteristics as possible before you make the decision to invest your hard earned money.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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