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Today’s guest post comes to us from Alban. Alban is a contributing writer at Home Loan Finder, a home loan comparison website
Investing in gold is a popular investment choice, especially in times of financial crisis when it remains strong when compared to investments such as real estate and stocks, and even increases in value. However, with the worst of the Global Financial Crisis (GFC) over for many countries, is gold still a good investment?
Overseas Influences on Gold Prices
In March 2011 gold is still hitting record highs and on 2-March, was at an all time high value of $1,440.10 per ounce, the highest it has been since 7 December 2010. While some traders believe this value is still not as comparatively high as it should be, being slowed with capped rallies, and not exhibiting the frenzied buying.
Gold continues to rise in value and become more popular as social unrest increases in the Middle East and North Africa raising the prices of oil. However, eyes on the Western world see the financial imbalances in the western economies as a more dangerous long term threat to financial security.
A higher gold price would also be beneficial for the US due to its budget deficit, so even though the initial shocks of the GFC are over, the after-effects can be seen as just as harmful to the stability of economies as there are now increased feelings of fear and uncertainty, should such a crisis happen again.
In the long term, gold is always a good investment option because of its ability to ride out economic uncertainty and global pressures. In India, investors have always looked at the long term results and India is the largest consumer of gold, followed by China, and China’s demand is expected to increase by 40% in 2011.
Rising Gold Prices
In 2010, when gold had already risen to $1,200 an ounce, predications of $3,000 or $5,000 an ounce for gold seemed crazy, but they are not now very far wrong. Analysts and investors are always aiming to predict where gold values will go in the future, and as a result, the calculation used during President Nixon’s time when the convertibility of the dollar for gold was temporarily removed.
The real price of gold is actually much higher in terms of US dollar convertibility, because with $13.789 trillion in circulation, and using a gold price of $1,200 per ounce, if the US had to return to a gold-backed dollar, the government would need to hold 11.5 billion ounces of gold. In 1971 when Nixon temporarily removed the convertibility of the dollar, the US money supply was valued at $35 an ounce, based on the supply to price ratio.
However, currently the US government only holds 261.5 million ounces of gold, so to make the dollar convertible again, the gold price is really $52,381 and with the US money supply growing every day, this figure will continue to go up.
In early 2011, gold continued to rise, and not just sporadically, but in consecutive weeks. Gold is an attractive investment option because of the rising oil prices, but if the increase in the cost of oil continues, the potential is there to stunt economic growth – rather than the price of oil rising because of demand, it is rising because of shocks to the supply.
For example, a $10 movement in the price of oil can cut 25 to 50 basis points from the GDP growth of the US and with this sort of impact, the GDP will struggle to show growth at all in 2011. If GDP growth doesn’t perform in 2011, the Federal Reserve will maintain their soft approach to monetary policy and it could be years before they raise official interest rates again. With high oil prices and a stagnant economy, gold will continue to be in demand as the investment of choice.
Rising Gold Prices in the Future
Gold has seen an incredible rise in value, and if you have invested in the precious metal early then you will be glad of your foresight. However, if you’re not already invested, or wondering how to manage your gold investments for the future, you have to wonder whether this ride has reached its peak.
As you make your decisions on what to do with your investment portfolio, consider all of the factors which are influencing the rising gold price. Gold prices continue to be ruled by the principle of supply and demand – when you leave out the influences of geopolitics, and accept the Global Financial Crisis as a simple low point in the investment time line, then you are operating in a unique market, which could result in a perfect storm situation.
When so many investors seek to diversify their portfolios through capital appreciation, they are mimicking a trend often seen over the long term. However, at the same time, central banks are looking to balance their portfolios too, and this is an unexpected factor, which hasn’t been seen on the market for decades. Plus, not only are the central banks shifting the focus of their portfolios, they are competing for the available gold.
With investors and bankers both focused on gold, which is not reliant on someone’s ability to repay their mortgage for example, the demand is also magnified by a stalled supply in the mines, as gold miners try to produce more gold than they have to replenish their reserves.
Plus, even though China set to surpass India as the largest consumer of gold in the world, the central bank in India was able to beat China to their purchases from IMF. The fact that the two largest countries in the world are competing so vehemently for the limited supply of gold, implies gold shares should be a good investment for anyone to have.
The current gold situation can be likened to the situation of the Dow Jones Industrials Average in the 1980s, where the index broke into four digits, and those who understood the trend were able to make their money simply by buying and holding onto equities as their value continued to increase. The same philosophy is likely to be realised in the current climate, yet many investors are still wary of the precious metal.
However, most investors’ concerns are unfounded. For example, gold is not a commodity which is moving in line with liquidity driven bubbles because if it was, when oil fell 75% from its peak of $140, gold should have dropped lower, but instead gold went higher. This is because gold is not actually a commodity, but a currency, and the one which is performing the best in the world, and not just against the dollar because gold is strong even against the powerful Swiss francs.
It is also important to note that gold isn’t actually in a bubble anyway because for a market to be in a bubble, an asset should be so over-owned that no one wants to buy it when the prices go down. However, since gold represents less than half a percent of the global financial assets, it is actually the most under-owned asset.
Over the last decade gold has been the most profitable, and the safest, financial asset, having ended each year at a higher value than the previous one. With everything that has happened around the world in the last 10 years, that makes gold an asset worth considering, because with strength through such crises it is likley to keep going up.
How about you all? Do you invest in gold? What strategy do you use to work it in to your asset allocation? Have you made much money with it in the long run?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
- There are a lot of good considerations above, especially some very good commentary of how world events are affecting the financial markets. However, this might leave the individual asking just how gold should be worked in to your investing strategy. This is particularly true if you are a passive investor, like I am.
- Currently, I do not have any exposure to gold in my overall asset allocation strategy. In fact, writing a post considering if I should add exposure to gold has been on my to-do list for quite some time now.
- In short, if I were to add exposure to gold in my portfolio, I would look for an index fund offered by Vanguard, in order to be in line with my passive investing strategy.
- As it turns out, the closest thing that Vanguard has to a gold mutual fund is the Vanguard Precious Metals and Mining mutual fund, symbol VGPMX. Even though this is an actively managed fund (a big red flag in my book), it does carry only an expense ratio of 0.27%. Because of the low expenses, it would be the most likely candidate that I would employ in my asset allocation. However, further investigation would be needed in order for me to execute upon this idea. Keep an eye out for a future post on this!
- One more question came up in my mind as I was reading this article – does anyone know if gold has increased in value due to recent events in Japan?
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