Investing in Gold by Giuseppe Marconi - 2008/09/19
Lately, the instability of the American economy has made many investors nervous, and there's been a lot of speculation about buying gold as a safe alternative to a market that continues to tank. These days, there are many reasons for that nervous feeling.
Devaluation of The Dollar. With taxes cut, and government spending for high ticket items, such as the war in Iraq, continuing to rise, new money gets printed as fast as the presses can roll it out. The US dollar continues to lose its value compared to the Euro, the Yen and the Canadian dollar, as evidenced by the growing number of international tourists coming to the States, taking advantage of the comparatively cheap prices.
Fear of Bank Failures. The Federal Deposit Insurance Corporation (FDIC) is expecting many bank failures in the next few years, due to the imploding housing bubble throughout the country, where too many loans were made, using shaky interest rate mechanisms. The resulting credit crunch will make it harder for people to take out loans, eliminating the biggest moneymaker for these banks.
Rise in Energy Costs. The rise of the cost of a barrel of oil has had far reaching effects on the entire country, from costs of transportation, to costs for animal feed, to heating bills. OPEC countries and Big Oil companies point blaming fingers at each other, with little result.
With the threat of uncertain times ahead, gold takes on the glow of a stable commodity, which will always be able to buy goods and services.
In the newspapers, you'll see ads for companies that want to buy scrap gold, or are selling gold bullion from around the world. It's true that for the past few years gold has been increasing in value, and it probably will for the foreseeable future. However, the ads don't talk about the long periods of time where the market outperformed the price of gold.
The graph below shows that investment in gold is mainly a hedge against inflation and unstable market losses, as opposed to gaining vast amounts of wealth. The green bar in the graph illustrates the relatively stable nature of gold investment, while stocks are subject to stressful highs and lows. On the other hand, stocks are very different from one another, as opposed to the uniformity of gold, and the allure of the stock market is that one might be able to pick and choose successful stocks that buck the market trends. Or you might have bought stocks at a low point, say in the mid-70s, and then rode the economic gravy train through the 80s and 90s. It's always easy to see what one should've done 20 or 30 years ago, but the next step into the future is full of uncertainty How much an American investor wants to buy into the gold market depends on how long they think the American economy will be on a downward trend, and it's beyond my limited capabilities to predict very far into the future. New political administrations could strive to reverse many of these trends, but their rate of success may not be obvious for some time. One will always have to keep an eye on the overall market trends, to make sure they're not losing out on taking advantage of an upswing in the economy. In any case, keeping a diversified portfolio will still be a good rule of thumb, so no one should be thinking of keeping a gold hoard in their basement.Ways to Buy Gold.
Exchange-Traded Funds. Exchange-Traded Funds (ETF's) are investing conveyances that hold many companies under one umbrella which are connected by a specific investment commodity. So if you want to get into the gold field, but don't want to invest all of your golden eggs into one particular company, a gold commodity ETF would be a good alternative. With many ETFs, each share represents a certain percentage of an ounce of gold, while others specialize in gold futures.
Buying stocks in Gold Mining Companies. Gold mining companies can be lucrative investments if they hit pay dirt. However, these companies are spread throughout the world, so any investor in particular companies have to deal with the uncertainty of companies outside the United States. There could be government interference, or outright appropriation, or foreign governments could dump their hoarded gold onto the market, which would reduce demand and price.
Buying Coins. Buying bullion is appealing to many people, enjoying the feel and weight of real coins, but there are costs in dealing with the actual metal. One of these would be the broker fees involved in exchanging coins, not to mention storage, security and insurance expenses.
Gold has been a safe place for investors for a long time, and with economic uncertainty prevailing around the globe, it'll stay in demand. Investors wanting to get out of the volatile stock market lately have driven the price of gold upwards. Whether this upward trend will continue or stall is uncertain, so any venture has a risk involved. As with any investment, keep a sharp eye on your money.
Away from gold then back to gold
How world currencies re-tie the knot with gold by Steve Austin - 2007/06/06
Up until 40 years ago all world currencies were pegged to the gold standard. It means anyone could take his money to a bank and come out with gold. As a consequence a country's central bank could only print money to the extent it had enough gold in reserve to back it up. But this all changed in 1971 when paper-money was deemed as trustworthy as gold.
Gold vs. DollarWas it a mistake? The recent trend of world economies is to "diversify away from US dollar investments". To put it another way, world economies are losing faith in the dollar because the US finances its trade imbalance by printing more and more bills. As goes the common saying "A tree does not grow to the sky" : printing more and more paper money does not increase worth forever and eventually the tall tree falls.
As world economies reduce their dollar reserves, gold is regaining favor as a safe bet. China and India, huge exporters and holders of US currency are both avid buyers of gold. There the ever-more affluent middle-class consumes a large portion of the gold market via jewellery. To some extend wealth flows away from the dollar into gold.
In China and India, gold is a keeper whereas dollars are not. Ultimately the two fastest growing economies may set the standard and history as to which asset will measure wealth and so far gold comes well ahead.
Did you know? by Steve Austin
Gold ingots are bars of pure gold that were cast in a mold, unlike gold coins which are stamped under a press. They have this rectangular shape simply for convenience of transport.The weight of gold ingots varies from a mere gram to several kilograms; the "London Good Delivery Bar" weights in at 400 ounces, or 12.5 kilos. At today's price, each bar is worth nearly $300,000!
Is there a "peak-gold" like there is a "peak-oil"? by Steve Austin - 2007/06/01
Oil prices have increased significantly in recent years, due to a market condition called "peak oil", whereby consumption outpaces production and new discoveries. Spot Gold price has increased also, but is this increase tied to the same market conditions as crude oil?Gold and oil market dynamics differ in at least one way. Unlike manufactured or petroleum products, gold's price fluctuations are not tied to its extraction costs. You may have read a different story in the press, but the floating volume of gold (the amount of gold that would arrive on the market if its owners decide to sell it) at around 20,000 tons exceeds by far the 3,500 tons mined each year. Furthermore, trading prices currently at around $700/oz are multiples of actual extraction costs in the $150/oz range.
Like Oil however, the consumption of gold by the jewellery, electronics and manufacturing industries has surpassed gold extraction for many years now. But to counter-balance this, hundreds of tons of gold are issued on the market every year by central banks, which attempt to liquidate as much as possible of this asset considered non-productive.
Why does gold rise?
Gold is a "blue-chip", stable investment. Even more so than real-estate since one can move gold to a different location. Its price goes up when those willing to buy it outnumber those willing to sell it. The main three reasons why buyers seek gold are:Today, all three conditions are present in the US market. The Federal Reserve has been artificially deflating the US inflation rate but today's real, high inflation, is the leading cause for high gold prices. More dollars buy less gold because the dollar is weak against all major currencies, consequently inflation is high. In addition, liquidity flooding BRIC countries allow investors to invest in gold which they traditionally value.
- Uncertainty due to war
- Risk of high inflation
- Lack of confidence in the economy and its leadership.
As inflation increases and the dollar depreciates, count on the price of gold to increase again in the coming months.
Did you know? by Steve Austin
Karats are often mistaken to be a weight measure used by jewelers. Instead karats are a measure of gold's purity.
Pure gold is too maleable to be used as-is by jewelers: a ring made of pure gold would bend and loose its shape and be impossible to wear. So jewelers "dillute" gold by mixing it with other stronger metals. One Karat measures the fineness of gold in 1/24 part which is 4.2%. Hence a 18 karat gold ring is made of 18/24 parts of gold, or 75% gold and 25% other metals.
Metals added to gold are of cheaper value, so for equals weight, the price of a jewelery item goes up when the karat count goes up too.
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