Invest in gold?
I have many friends and clients who have recently asked me about whether to invest in gold. Before we turn to this question, let’s talk about GOLD. For millennia, gold has been a barometer of financial health and ultimate value. It has long been considered the ultimate contribution to safe haven when all else fails, especially after the credit crunch and global recession.
So now that gold has made a second big swing – shooting from $ 600 an ounce to $ 900 an ounce after breaking the $ 1,000 plateau last year, is “yellow metal” still a smart investment, or is it already an invested investment with?
Before we can answer the above question, let’s look at “GOLD 101”; the supply and demand of gold, which in turn determines its price. Speaking of the price of gold, here’s an interesting fact about the price of gold
The price of gold is there
$ 252.80 July 20, 1999
$ 255.95 April 2, 2001 (where the bull started)
$ 1,011.25 March 17, 2008 (mileage peak)
$ 692.50 October 24, 2008 (price due to the credit crunch)
$ 930.00 on January 31, 2009
$ 881.00 as I write this article …
If you noticed a sharp drop in gold prices over a short period of 6 months from the peak in March 2008 to the valley in October 2008, it is clear that a huge drop in prices occurred as a result of the credit crunch as a result of gold investor withdrawals among falls in all others asset classes.
If we consider gold compared to other commodities, I would find it safer because it moves independently. Gold is the only commodity with a positive increase compared to other commodities in 2008.
There are many factors that affect the supply and demand of gold. Examples are US dollar prices, political risks, inflation, new gold discoveries, etc. Honestly, there is no single factor that could determine demand and gold in general.
According to the World Gold Council, the demand for gold in 2003-2007 is broken down as follows:
Jewelry – 68% (2008 – 59%)
Use in industry – 13% (2008 – 11%)
Investments – 19% (2008 – 30%)
The gold offer is as follows:
Processed gold – 25%
Mining – 60%
Net sales of the Central Bank – 14%
It should be noted that the net sale of the central bank by supply was quite constant after the incident in 1999, when the UK bank sold 400 tons of gold, which caused a fall in gold prices in the same year. Since then, to prevent such a sharp drop in gold prices, most central banks have signed an agreement not to sell more than 400 tons of gold at a time. The current agreement of all central banks does not provide for the sale of more than 500 tons of gold on the market, except for the central bank of the United Kingdom. Currently, all European central banks have 60% gold reserves, except the UK only 40% after a big sell-off in 1999, which he probably regretted for many years …
If we talk about the jewelry side of the demand for gold, there is no doubt that India is the highest, followed by the United States (but in recent years it has fallen), and then China (over the past 5 years, demand for jewelry in China has doubled)
Demand for gold for industrial use over the years has been fairly consistent, although it is expected to decline slightly amid the global recession.
It is worth noting the surge in demand for gold from investments. 30% of total gold demand in 2008 compared to only about 19% in previous years. I believe that these figures will continue to grow in 2009.
By switching our focus to supply factors, people who sell gold will always be found when the price starts to rise. The percentage of processed gold as a supply tends to increase as gold prices rise.
The good news is that gold mining is declining, and this accounts for 60% of gold worldwide. In recent years, there are no new discoveries, because then the price of gold is low, and gold mining is expensive. The bad news about this supply factor is that as gold prices continue to accelerate, businessmen are stepping up to start mining gold again and thus increasing the supply of gold as new mines open.
Net sales of gold at the central bank over the past few years have been fairly consistent, with the U.S. currently holding about $ 252 billion in gold reserves
This brings us back to the big question, “Should I invest in gold?”
From the above analysis, it is clear that the price of gold will rise as investment demand for it increases in 2009. Counteraction to the price of gold will arise as a result of increased recycled gold and new subsequent ventures.
As the US dollar may depreciate in the long run, as mentioned in my second blog, and inflation will rise in the future, gold could become a good hedge against the US dollar.
Therefore, gold is a necessary component of almost any portfolio. The problem is that the iShares SPDR Gold Trust ETF has already amassed more gold than the rich countries of Switzerland and China. This means that any transition of the mass of investors to leaving the metal will have a huge reduction effect on it.
But knowing this important technical risk, I would still be willing to invest if gold returned to $ 750 an ounce. From there, I would continue to build a prudent position that would not exceed 10% of my portfolio, as we should see a price spike as soon as inflation starts to manifest in 12 months and 18 months. As inflation rises, be prepared to sell gold at prices above 1,000 marks.
I hope you enjoy this discussion.
Let’s talk again and you have a fantastic week ahead!
Philip Chua, ChFC CFP FChFP
IARFC AMC B.BUS (Hons)
http://www.philipchua.com – a place to master wealth
Twitter me @phichua.