All Roads Are Not Paved with Gold
Monday, 01 September 2008 19:58
For a while now I have been bleating on about the potential benefits of investing in gold. Its price has rallied from around US$340 to over US$900, with a slight correction to its current price of approximately US$831. I have heard many different opinions on gold as an investment, some saying that they cannot see the value of gold, others saying it is too expensive (since it was in the US$400s), while fans discuss the virtues of gold as an investment. It is a currency they say, it is in high demand as jewellery, and there is only a finite supply of this metal.
Gold has two distinct guises – gold, the commodity; and gold, the crisis currency. As a commodity, gold reacts to the law of supply and demand. When there is confidence in paper money and economies are thriving, there is not much profit in trading gold, the commodity. Gold, the crisis currency, is a totally different animal. It takes on this role when confidence in paper currency has broken down. The environment is one of crisis, whether that be oil, monetary, currency, banking or political. At these times people are generally depressed and pessimistic about the future. Taking rational decisions in this climate is extremely difficult, but crucial. Gold is an essential requirement for surviving a crisis period and even profiting from it.
What Influences Demand?
Gold jewellery can be divided into two broad classifications – as decoration and as an investment. The former is typically sold to western countries and contains a considerable degree of artistic value enhancement. The latter is sold to the Gulf, the Indian sub-continent and the Far East where its value resides in its gold content rather than its design. The tradition of wealth being stored in jewellery is long established in India and the Middle East. However, as this demand is created by wealth rather than fashion, it is much more susceptible to changes in the economic circumstances of the purchasers.
The Gold ETF is a security listed on the NYSE. The value of the ETF is determined by the dollar price of gold. This ETF has changed the fundamentals and the structure of the gold market. Anyone with an equity account can own gold without the costs and risks associated with holding physical gold. Gold Field Mineral Services estimates that mine reserves are being reduced at in excess of 10 percent per annum. This reduction is being driven by a number of factors, namely the increase in the price of gold, the fall in lease rates and shareholder pressure for simpler and reduced hedge programmes.
What is the future for gold?
This is the million-dollar question. It is my belief that we will see continued pressure on the markets with a further unravelling of the financial sector and weakening of the dollar. I also believe that oil will continue its upward trend. I would not be surprised to see gold break the US$1,000 mark – experts have been throwing around numbers like US$1,500 and US$2,000. Having said all of this, nothing is certain in the markets, but I think that gold is still a good option for investing in these troubled times.
How to Invest in Gold?
You can buy the physical gold bullion and store it in a safe or hold it at a bank. Alternatively you could simply buy the gold ETF mentioned above or invest in one of the many funds available from the Merrill Lynch World Gold Fund through to some very interesting gold hedge funds or mining funds. Whatever you do I would strongly advise that you consult with a professional financial advisor to ensure the fund you select matches your attitude to risk and your investment time horizons.
Gold has two distinct guises – gold, the commodity; and gold, the crisis currency. As a commodity, gold reacts to the law of supply and demand. When there is confidence in paper money and economies are thriving, there is not much profit in trading gold, the commodity. Gold, the crisis currency, is a totally different animal. It takes on this role when confidence in paper currency has broken down. The environment is one of crisis, whether that be oil, monetary, currency, banking or political. At these times people are generally depressed and pessimistic about the future. Taking rational decisions in this climate is extremely difficult, but crucial. Gold is an essential requirement for surviving a crisis period and even profiting from it.
What Influences Demand?
Gold jewellery can be divided into two broad classifications – as decoration and as an investment. The former is typically sold to western countries and contains a considerable degree of artistic value enhancement. The latter is sold to the Gulf, the Indian sub-continent and the Far East where its value resides in its gold content rather than its design. The tradition of wealth being stored in jewellery is long established in India and the Middle East. However, as this demand is created by wealth rather than fashion, it is much more susceptible to changes in the economic circumstances of the purchasers.
The Gold ETF is a security listed on the NYSE. The value of the ETF is determined by the dollar price of gold. This ETF has changed the fundamentals and the structure of the gold market. Anyone with an equity account can own gold without the costs and risks associated with holding physical gold. Gold Field Mineral Services estimates that mine reserves are being reduced at in excess of 10 percent per annum. This reduction is being driven by a number of factors, namely the increase in the price of gold, the fall in lease rates and shareholder pressure for simpler and reduced hedge programmes.
What is the future for gold?
This is the million-dollar question. It is my belief that we will see continued pressure on the markets with a further unravelling of the financial sector and weakening of the dollar. I also believe that oil will continue its upward trend. I would not be surprised to see gold break the US$1,000 mark – experts have been throwing around numbers like US$1,500 and US$2,000. Having said all of this, nothing is certain in the markets, but I think that gold is still a good option for investing in these troubled times.
How to Invest in Gold?
You can buy the physical gold bullion and store it in a safe or hold it at a bank. Alternatively you could simply buy the gold ETF mentioned above or invest in one of the many funds available from the Merrill Lynch World Gold Fund through to some very interesting gold hedge funds or mining funds. Whatever you do I would strongly advise that you consult with a professional financial advisor to ensure the fund you select matches your attitude to risk and your investment time horizons.
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