Copyright © 2010 MoneyHoneyBlog. All Rights Reserved. Snowblind by Themes by bavotasan.com. Powered by WordPress.
With the dramatic falls and high volatility in the stock markets over the last 15 months coupled with economic uncertainty, it is little wonder gold has surged in popularity with investors. The decline of the dollar and threat of strong inflation in the coming years has seen investors flock to gold.
It’s not just retail investors either… fund managers and institutions have also been attracted by the shine. And, for the first time in 22 years, central banks are net buyers of gold.
In the last six months gold has shot up from $880 to today’s record high of $1,226 an ounce. Over 12 months it has surged by over 55%. But how much further can it go? Are we witnessing a gold bubble that is bound to end in tears, or are prices heading further north?
Experts’ opinions are split. While many are calling for $1,500 – $2,000 an ounce (and even as much as $4,000 in a few cases), others urge caution after the recent bull run. The bulls argue that gold is, in inflation adjusted terms, comparatively cheap. In 1980 gold reached $850 an ounce – around $2,200 at today’s prices.
Gold is traditionally seen as a safe haven in uncertain times, as well as a hedge against inflation and the US dollar. (As the dollar weakens, the price of gold rises. And the greenback continues to be under pressure thanks to record low interest rates and the trillions of dollars being pumped into the US economy.)
How can you invest in gold?
First of all… what is bullion? Simple. Bullion is a ‘refined and stamped weight of precious metal’. Therefore, any tradable form of gold that you can buy at the current market price of gold (plus costs) is gold bullion.
Physical gold – bullion bars and coins
When looking at the various forms of physical gold, compare the premium (the percentage over the spot price of gold as quoted on the markets) for each of them.
Bullion bars, especially the larger ones, usually sell at a lower premium, followed by krugerrands and then sovereigns (coins). Bars are somewhat more difficult to dispose of and you will need to sell through a specialist gold dealer.
The majority of retail investors buy krugerrands and sovereigns, whereas bars are preferred by institutions, governments and central banks.
Krugerrands are the most popular type of modern 1 ounce gold coin. They can generally be bought at lower premiums than other bullion coins.
There are also many other, lesser known types of gold coins. Premiums tend to vary, so it’s best to obtain reputable and professional advice before purchasing.
Sovereigns, semi-numismatic gold coins, are sold at a slight extra premium, due to their historic and aesthetic value and smaller size. (Note that in the UK sovereigns are exempt from capital gains tax.)
Bullion coins and bars can either be delivered to you or stored. When stored, consider the solvency and credit rating of the depository, as well as security (and of course any fees). When delivered, you will need to arrange suitable insurance and safekeeping.
The World Gold Council is a great resource with a directory of reputable gold dealers.
Gold certificates
Gold certificates are cost effective, eliminating the need for shipping, storage and insurance. They are also liquid and can be sold easily. As with bars and most coins, your investment is solely determined by the price of gold.
When purchasing certificates, you need to consider the solvency and credit rating of the issuer. The Perth Mint Certificate Programme is the only government backed precious metal certificate programme in the world.
Shares and Funds
Investing in gold mining stocks comes with a greater risk. Unlike physical gold, share prices are influenced by each company’s performance and earnings, hence the price does not always move in accordance with gold price.
Due to the risk and volatility of individual gold mining shares, investors should generally avoid purchasing just one or two stocks. Unless, of course, they have a thorough understanding of the industry and are apt at analyzing individual companies.
Collective investment vehicles such as mutual funds offer exposure to the sector through a portfolio of gold mining stocks. They offer a lower risk and have proved a popular way to invest in the precious metal sector.
There are numerous choices of funds that invest in gold miners, as well as many others that offer a basket of natural resources and energy sectors, including gold and other (precious and industrial) metals.
Exchange Traded Commodities (ETCs)
ETCs track a particular commodity or basket of commodities. Like ETFs (Exchange Traded Funds), they simply mirror a specific index or sector they are tracking.
Gold ETCs track the price of gold and are available from a number of ETF and ETC providers. Some ETCs also allow traders to short (bet on falling prices) or leverage their investments. (Leveraged ETCs multiply the profits or losses incurred.)
As with ETFs, before investing in ETCs, make sure to read and understand the prospectus. They vary in structure and will therefore respond differently to market changes.
ETFs and ETCs are traded on exchanges as regular stocks and can be bought and sold through stockbrokers, including online brokers. As with mutual funds, there is an annual administration fee, albeit lower (typically 0.35 to 0.5% pa).
Trading gold
The above options are suitable for (longer term) investors in gold. Traders tend to use derivatives, incl. futures, options, spread betting, etc. These (high risk) instruments are best suited for short term speculations on price changes, and should not be used for long term investment.
ETFs, while popular with investors, are also often used by traders, hedge funds and institutions speculating on short term movements in the gold price.
December 19, 2009 at 1:25 pm
Gold is not a value investment according to Graham, by the way. Intrinsic value is zero. It is being stored in vaults. It can not be used for anyting, or, more accurately, it can be replaced easily by other cheaper metals. It has got the value of perception, only.
December 21, 2009 at 1:18 am
Sure, gold is not a value investment. But then again, not all investors are value investors and gold is unquestionably very popular in times of uncertainty and chaos. It’s the safe haven quality, as well as being a hedge against inflation and the dollar, that makes gold appealing at particular times. However, gold doesn’t create wealth, as say stocks (can) do. Over the very long term gold hasn’t produced great returns.
December 31, 2009 at 7:11 am
A seller asked
January 1, 2010 at 3:11 pm
It is awesome to see this blog is finally getting the attention that it totally deserves. Keep up the great work.
January 2, 2010 at 4:02 am
GOLD…..me personally, NEVER !!
Land….New Era, YES !! (Think population growth. It would be fair to say that the “worlds” population is growing ).
My opinion on the Stock market……the drive for profit will always overturn the drive for efficiency, not to mention, corruption (insider trading and collaboration btw major companies). My opinion honestly, this crash was done with every intent. I firmly believe it was purely motivated by oil. The americans created a stalemate for the oil rich who were making too much money…crash the market, arabs make less money which they don’t need anyway, which obviously money made from selling oil was re-invested in share market. Obviously oil was out of the equation, lol. Arabs couldn’t lift oil price as world wide recession would of created a sharp drop in demand which in turn effects price, for which then they would have to cut supply. The American plan worked…arabs didn’t have to drop production or price and obviously Americans are happy paying less. The world is dependant on how America does, up or down everything eventually is bought with the $US but for the sake of stopping arab nations gaining even more power and wealth this was necessary.
This crash in no way affected The Vatican or The Church of England.
It has to be noted that if you purchase land, things to look for is “WATER” and some basic infrastructure….you might even find GOLD or other MINERALS within the land, lol.
Main Metropolitan fringes/outskirts should also considered as cities expand outwards, never jumping but joining onto existing infrastructure.
If at anytime a country like Australia for example wanted to sell off it’s gold reserves at these record prices, it could, knowing that is in a plentiful supply.
GOLD is but a mere illusion, a form of control, driven by countries collaborating together, YES, Price fixing if you will.
GOLD is controlled by countries not companies so, this poses a risk for smaller investors.
GOLD is known as a last resort for “everyone” this is why caution is advised.
Demand for gold for it’s “actual” uses are very low.
If my memory serves me well you cannot just sell a countries reserves unless it is approved by I.M.F (USA…laughs), please correct me if I’m wrong.
Ok, lets just say that stock market crashes, “present”, majority investors, which still have money left buy gold; Demand goes up this sets price high; investors invest; country sells large amounts of stockpiles; price “crashes” below expectations; buyer confidence tumbles; no demand.
This still doesn’t affect countries which have reserves because it just sits there, eventually it will go back up over time.
Who buys the GOLD when it crashes ? “Countries” that don’t produce any, countries who wish to follow the leaders or wish to use tax payers money or China (*sarcasm), countries or entities which have great wealth (The Church of England, The Vatican and Saudi Arabia, Israel not included as they don’t really need to invest in something that would be looked at as a form of an ancient bartering tool, I’m sure they have “bigger fish to fry” such as technology for gathering information for espionage purposes another form of control or to have “the upper hand”.
My prediction is gold will hit it’s peak at $2.5k to $3k US an ounce. At this price you can see how countries could be tempted to sell off reserves.
“Governments of Australia, Switzerland, the Netherlands, Argentina and Belgium, as well as Britain, have sold gold reserves in recent years, arguing that gold represented too large and risky a proportion of their total reserves”
source – http://www.theaustralian.com.au/business/markets/bank-of-england-admits-its-gold-reserves-arent-in-mint-conditio/story-e6frg916-1111114538342
^^ meaning – They have a lot of GOLD undocumented in stockpiles ready to replenish stocks as soon as it crashes. Not one country will expose the truth about undocumented stockpiles obviously as this could affect it’s curtain of illusion.
some wiki info – http://en.wikipedia.org/wiki/Gold#Production
** All GOLD reserves mentioned are documented only. IMHO undocumented gold is plentiful.
Disclaimer : All comments above are based purely on my opinions please feel free to voice your opinions and predictions.
Thank you for this chance and for this most wonderful site, Petra.
4Rs
4Rs´s last blog ..SEC Charges California Telecom Company With Bribery and Other FCPA Violations
January 4, 2010 at 4:37 am
Thanks for your comments. While I respect your opinion, I don’t agree with your conspiracy theories about the market crash, etc. As for gold, I wasn’t advocating buying but simply laying out the options for those who do want to invest in gold. While gold has had a good decade, so did many other commodities (copper for example has seen similar gains to gold).
Gold is a good hedge against the dollar; as such the short term outlook for gold seems less certain. While I believe the commodities bull market will not be over for another few years, I wouldn’t want to make any particular bet on gold in either direction.
January 4, 2010 at 6:32 am
*Reads his comment again and laughs at his conspiracy theory….
My apologies Petra….Ok a bit far fetched I suppose for some, but they sure seem to be throwing money around still for a country that is in recession; Trillion here; Trillion there and everywhere….
Back to the topic….
GOLD – “Yes you are right” gold is another option for the time being and shows to be very stable. I can see why investors would be rather keen on investing in gold for the time being, just be cautious I say don’t just rely on it and expect to be safe.
I must admit though I’m from Australia so I have entered this discussion with my head up high and with certain cheek.
** Throws another shrimp on the BarB
4Rs
January 21, 2010 at 10:56 am
I am looking for a good gold trade forum, any suggestion anybody? I mean a palce where individuals would sell and buy gold privately?