You can almost categorize investors into two types when talking about gold. The first group is known as the “bugs”, people who have hundreds of reasons for investing in gold and will praise the precious yellow metal no matter how deep its prices decline. The other group is known as the “bears”, people who seem to always have something negative to say about gold despite its value when the economy is doing badly.
Whatever these two groups are saying, don’t take their words as truth. There’s no place for fanaticism when it comes to investing as there are clear pros and cons in doing it, and all investors know that. What’s important is that you know why you’re investing in a particular stock or commodity in the first place.
Diversifying with gold
For hundreds of years, gold has been looked at by investors in times of uncertainty. This is because gold is an asset that doesn’t move along with other securities. When gold is doing great, you can almost expect that the economy is doing badly. Check out today’s news and see why there’s a current gold rally. The precious yellow metal is currently strong because the U.S. economy is gloomy again and U.S. retail sales growth were on a 12-month low. Economic factors like these make investors skeptical about the future of the U.S. economy are reasons for gold prices to go up, making the precious yellow metal a favorite diversification asset among investors.
Factors that affect gold prices
Gold prices mirror the overall sentiment of investors toward the economy. Supply and demand also plays an important factor, but fear is the catalyst that makes the prices move up and down. When there’s political turmoil like what happened between the Ukraine and Russia or high government spending like the recently-concluded stimulus by The Fed, investors fear for the economy. When scenarios like this happen, gold prices go up. On the other hand, when the economy is doing well and there’s isn’t much trouble in the world, this can affect the overall market, with gold prices losing its bearing.
In 2013, investors will remember that Germany decided to repatriate some of its gold from New York vaults. Some news sources claim that the reason for this was because Germany was preparing for a crisis that would hit the Euro zone. Germany is the world’s second largest gold owner and at the time of its repatriation order, gold was selling at around $1,640 per ounce. If in case a currency crisis really happened and it decided to liquidate its gold reserves, Germany would be able to cover its economy for many years. The moral to this story is that holding gold for the long term can be good for future uncertainties.
Different ways to invest in gold
There’s no “best” way to hold gold. Investors’ need to differ from each other and it all boils down to why they need gold in the first place. Those who are thinking about preserving their wealth usually go for the physical metal, either in bar or coin form. Holding the physical metal is the most direct way to get exposure in gold but its storage, shipping, and other associated fees make this type of investment very expensive. Private investors who can’t afford to own the physical metal opt for the cheaper ETF investments that track the gold prices and only cost about 1/10 of the metal’s spot price. Others who want physical gold’s insurance but don’t want to pay for its storage, shipping, and other associated fees open an unallocated gold account with banks to be able to buy gold whenever they want to. Go with whatever type of gold investment works for you. It’s more important than jumping on the bandwagon of what’s currently the hottest form of gold investment.
Guest Author: Arthur Wang
Mr. Wang is a freelance journalist specializing in commodity investment. He used to work as a high school English teacher until he realized his love for covering financial topics back in 2005. He likes spending his free time watching Chef Gordon Ramsay’s TV shows.
The opinions expressed herein are those of the authors and do not necessarily represent the views of Money Basics or Charter Trust Company. Nothing contained in this communication should be construed as investment advice.