Invest in Gold

Monday, December 10, 2007 | Labels: | |

"The great strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. That ought to remain its best credential". A research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. Its purchasing power in the mid-twentieth century was found to be nearly the same as in the middle of the seventeenth century.

You can safely invest in gold. But take care to keep your jewelery in bank lockers. You can also raise loans on gold for your other portfolio investments. Several options have emerged for investors to invest in gold bars, gold coins, gold funds, gold mining companies and gold mutual funds.

Factors influencing the gold price

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, because almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. Given the huge quantity of above-ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. Central banks and the International Monetary Fund play an important role in the gold price.
  • Bank failures
    When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.

  • Inflation
    Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation. Historically, currencies have lost their value in this way over time. In times of inflation, people seek to protect their savings by purchasing liquid, tangible assets that are valued for some other purpose. Gold is in this respect a good candidate, since producing more is far more difficult than issuing new fiat currency, and its value does not rely on any particular government's health.

  • Low or negative real interest rates
    Gold has a long history of being an inflation proof investment. During times of low or negative real interest rates, when significant inflation is present and interest rates are relatively low, investors seek the safe haven of gold to protect their capital. A prime example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

  • War, invasion, looting, crisis
    In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.

  • Production
    According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes.

  • Demand
    About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

  • Supply and demand
    Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and therefore potentially available for sale. However, supply and demand do play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold exchange-traded fund, but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.

Bookmark and Share


DISCLAIMER: All content is provided on as-is-where-is basis without any warranties. We shall not be liable for any consequences arising from the content of the posts on this blog.