Gold is rare and cannot (easily) be faked so it retains its value even though banking systems and paper money are crashing. This is because gold has an intrinsic value which is not contingent on a third party's performance or mere promise to pay. In fact, there's a law in economics known as 'Gresham's Law' which states that when there is legal tender currency (as the case with the Dollar), bad money will drive out good money out of circulation. Look at it another way. Should inflation continue rising then your food, fuel and gas are likely to continue moving up in price. So, if you had to visit your gas station and you had the choice to pay with either pure gold coins or US backed paper dollars...with the dollar giving ground while the price of gold remaining stable what would you spend? [obviously you would want to keep the gold!]
The boom in the gold price is also partly as a result of its desirability by a growing middle class in China and especially India (two-thirds of the global demand for gold originates from the the traditional demand for jewellery). In fact, China now produces even more gold than South Africa. China is now the planet's leading gold producer. China's 2007 estimated output comes in at 276 metric tons of precious gold (about 9.7 million ounces, 12% increase over 2006) surpassing the long time leader, South Africa with an estimated 272 metric tons. South Africa had been the world's largest gold producer since 1905. Its also worth noting that local production in China has risen by about 15 percent a year in stark contrast to global production which in on the decline.
The USA can and probably will print more dollars to bail its economy out of the excesses of the property boom and subsequent credit crunch. To some extent, oil producers can pump more oil. It isn't so easy to find more gold. In fact gold as an asset is unique in that it is not dependent on the performance of auditors, bank, corporations, financial institutions politicians or governments.
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Thereby, we can say that Gold is a preserver of wealth. It will not get you any richer but it holds its value against inflation. When Elizabeth the First reigned, an ounce of gold would buy a man a suit of clothes, a fine pair of shoes and a hearty meal. Today, with Elizabeth the Second reigning supreme, an ounce of gold affords a man a suit of clothes, a pair of shoes and a Happy Meal. (I don't have access to pricing of women's clothing during the Elizabethan period--sorry!). Look at the price of gold in the 80s, then the 90s, now today. If you bought gold in the 80s you'd finally be breaking even.
Gold is the ultimate form of financial insurance. This is the reason every major central bank in the world still maintains a considerable portion of their reserves in gold bullion and many nations such as the Chinese, are now looking into increasing their gold bullion reserves.
Gold also acts as a hedge against financial/political turmoil. When financial/political turmoil levels are rising, so does the price of gold - consider gold as a protection to maintain your savings from collapsing currencies (gold can never go to zero). When financial/political turmoil levels are improving, the price of gold usually drops. So keep in mind that gold acts as mainly as a hedge against inflation and currency volatility meaning that the price of the gold metal will rise to offset any rise in inflation and currency prices. However, the price of gold also moves significantly and short-term traders can make a profit (or suffer a loss) from investing in gold.
In my book, gold is also one of the few investments that does not involve a future promise to repay, as stocks and bonds and CD's do. This can be a very important property during difficult times. Of course, gold doesn't always appreciate in price. In 1980, it was selling at more than $800 an ounce. Twenty years later, it had dropped to $275. It is theoretically possible to get rich by betting on fiat currencies and against gold. But the scoring average of all those who try is pretty poor.
In general, precious metals performance does not correlate with S&P performance, nor does it correlate with US bond performance, nor does it correlate with foreign stock performance. Thus precious metals can provide an additional element of financial diversity to any investment portfolio.
So what drives the price of Gold? The US dollar is the most obvious factor to check as a driver for the price of gold (in dollars) and money supply being the next logical factor. Money supply relates to the speed at which money is being printed by governments, especially in the USA which has been upsetting investors as America seems loathe facing the problem of wild expenditure. Keep in mind that the price of gold is mainly affected by sentiment as opposed to demand. This is akin to any stock market investment, where sentiment or rumour can have a marked effect on the share price with the difference that gold has an intrinsic value.
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My own personal philosophy involves selling out of investment categories that are entering downtrends and buying into investment categories that are in uptrends to keep average returns positive. Others will stick with one investment category through all of the ups and downs in hopes that the long term average will be positive. If you subscribe to the latter philosophy, and if you are going to confine your investment activity to a single investment category, then clearly precious metals is not the best long term choice. However, if you subscribe to the former philosophy, or if your investment activity is going to cover many different investment categories, then precious metals definitely have their moments!
Last year gold has underperformed other commodity prices which further boosts attractiveness of the yellow metal in an environment with many uncertainties. Gold should be rising because apart from anything else there is a big demand from retail buyers worldwide. However for sometime Gold was going down as investors withdraw capital from hedge funds. This is because hedge funds were having to liquidate their commodity assets to provide that cash. That's why all commodities had been falling together in 2008. Add to that a rising USA dollar which should usually mean a fall in gold price.
Then if governments around the world are giving assurance of bank deposits why do you need gold?
Cash may still be king at the moment but Gold is now trading back to near its historic intraday high of $1,033 an ounce. This means that it is up more than 30% in the last 12 months with investors using the golden metal as a store of value against inflation. Even central banks are starting to switch again to net buyers from net sellers due to the uncertainty over currency valuations as a result of the various quantitative easing programmes around the world. However, the gold price isn't expected to go up in a straight line. It usually makes its big move as we start to come out of a recession as inflation picks up with rates increasing and currency falling. Remember though that high prices for gold tend to boost supply and kill demand as what happened with oil last year. At the moment for instance investor demand for gold is very strong but high gold prices will discourage people from buying jewellery (which still accounts for 2/3 of the global demand).
>> Tips for Spread Betting on Gold
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