Not too sure what to think about the recent drop in gold prices? Opportunity to buy more gold or sign to liquidate your own? There are obviously two schools of thought here, but many financial analysts tend to think that this price drop is only temporary. Let’s start with a little bit of history first…
The measure of all things
Gold has always been more than just a metal from which to coin money. It has also been a way of measuring the value of commodities and of determining the value of national currency — hence the expression “worth its weight in gold.” At various times in American history, there have been debates about how exactly to use gold as an economic yardstick: In the early days of the Republic the country adopted a bimetallic standard, according to which the larger denominations would be minted from gold and the smaller ones from silver. The gold and silver rushes of the middle and late nineteenth century heavily influenced American financial policy. After the Civil War, of which financing required Congress to issue paper money, the country wanted to revert to the antebellum metallic standard. And while no gold or silver coins have been minted in the United States since the 1930s, the federal treasury still keeps a store of gold to back the dollar.
A good time to invest
Today, when we are in the midst of a financial crisis, the need to buy gold may be greater than ever. The price of gold has recently begun to plummet, and anyone who can should take advantage of this development to make bulk purchases of the metal and store up for a rainy day. The significantly lower price is in large measure due to the efforts on the part of the federal government to make it that way, while at the same time inflating the stock market. By doing so, they aim to do two things: increase the prices of stocks even as economic conditions deteriorate, thus reassuring the faith of the public, and likewise increase the value of the dollar while undermining public sentiment in precious metals.
The strategy has been working — so far, that is. But like any attempt to achieve a desired end through manipulation and resorting to extremes, it can only last so long; eventually it will reverse itself. The artificial inflation of costs has affected only a few commodities besides stocks — real estate and bonds among them, and the latter only to a certain extent.
By contrast, the price of silver has risen 160 percent since 2011, so that the Dow can be purchased with over 620 oz. of the metal, compared with 250 in the past. During the same period, the cost of gold has gone up by 85 percent.
Guarding against inflation
Gold was and is a safe haven against the threat of inflation. Market analysts have found that those who sell gold futures (if they are only making an investment, few people will deliver actual, physical gold) use the funds to purchase stocks that pay dividends, which make it possible to generate a profit no matter what the present state of the market.
A crowded market
So many people are eager to buy gold futures that the markets are becoming crowded to the point of bursting: In April 2013 more than 153,000 oz. of gold coins were sold by the U. S. Mint, more than twice the amount sold the previous month. Timing, therefore, is important to the individual who wishes to invest in this market. Peter Krauth, Resource Specialist for Money Morning, says he believes the gold bull market will see prices go high up before it is all over.
2013 is seeing many investors increase their gold holdings, as the Obama re-election late last year meant the same financial policies will be in effect for his 2nd term.
Here is a great infographic that presents some of the world’s most famous gold investors, including the percentage of their portfolio that they invested in precious metals.
(click to enlarge)
View full infographic here.
The gold standard has withstood the test of time as nations use this valuable precious metal for monetary exchange, jewellery and industrial processes. During tough economic times, gold becomes a more appealing purchase. Gold eagles sales, ETF investment and new gold exchanges show that the gold investment landscape is looking positive for 2013.
Gold Eagle Coin Sales
According to the United States Mint, sales of its gold bullion American Eagle coins was more than double in November 2012 (173,500) than in November 2011 (65,600). New investors are entering the gold market. Coin dealers expect even higher sales for 2013.
The wealthiest people in the world continue to add gold to their portfolios. These include Jim Rogers, George Soros and Marc Faber. Gold-traded ETFs had had 11 straight inflows in October 2012. Billionaire Mexican Carlos Slim invested in gold mines. The future for gold investment is bright.
Venezuela, Switzerland, Germany and Austria have requested the repatriation of their gold. During uncertain times, gold remains the medium of exchange. Many gold bars have been loaned out to investors who appreciate the value of this eternal asset.
Financial experts are concerned with the fiscal cliff of the United States and the effect on the paper dollar. This could lead to hyperinflation. Gold is a good hedge against dollar depreciation.
Germans Have Lived Through Hyperinflation
In the 1920s, the Germans lived through hyperinflation. Those without gold saw their paper money lose all real value. In 2013, Germans will continue to purchase gold.
According to the thelocal.de, as many as 69% of Germans own gold. The average holding is 117 grams (3.76 troy ounces) of gold. They are planning ahead for the collapse of the European Union.
The gold investment landscape is even more excited about the potential for rising nations, like Brazil, India and China to increase gold purchases for 2013. The Chinese deliver physical gold to buyers who purchase from their newly opened exchange.
Gold is a favorite currency of exchange for international commerce. Central banks trade in gold. During times of high inflation, gold is very popular.
Bloomberg did a poll of 700 bankers, traders and investors at the London Bullion Market Association conference in Hong Kong who expected a higher gold price between $1,849 and $1,920 a troy ounce for 2013.
Here are some more predictions for the gold price in 2013:
- BNP Paribas at $2,225
- Deutsche Bank at $2,200
- King World News at $2,500
- Morgan Stanley at $2,175
- Societe Generale at $2,000
- Thomson Reuters at $2,000
All of these factors suggest a very positive outlook for gold in 2013.
Investing in gold isn’t just a good way to earn a profit in the long-term; it’s an excellent way to protect profits that you’ve already earned through other endeavors. For years financial advisors and fund managers have known the wisdom of securing a portion of a portfolio with instruments that are backed precious metals. Yes, it is true that gold typically becomes more valuable in times of economic uncertainty. But, more importantly, it has a tendency to retain a steadily increasing value, and it will always retain some level of monetary use.
Fending Off Inflation
If the value of the dollar continues to decline, and it probably will, inflation rates will continue to rise. As inflation rises your money becomes worth less every year. If you can buy something for $100 today, you might need $200 to purchase the same item ten years from now. On the other hand, if you buy an ounce of gold today, in ten years you’ll still have an ounce of gold, and according to most analysts, the price of gold will probably have doubled by then. In fact, when adjusting for inflation many believe that gold could peak at as high as $15,000 per ounce at some point between 2013 and 2020.
Mining Company Stock
A good way to indirectly capitalize on the profitability of gold is to invest in mining company stocks. The logic is simple, yet convincing – gold mining companies make strategic decisions to ensure the growth and sustainability of their company, which is based primarily on the ever-rising demand for gold. By investing in gold mining stock you hedge your bets on a corporation who is making well-informed decisions to continue providing their customers and shareholders with a satisfactory service. Mining stocks can also provide a form of steady dividend income, and their value tends to be even less volatile than gold prices.
Exchange Traded Funds
Exchange traded funds (ETFs) are simply pools of investors who combine their monetary resources under the guidance of professional fund managers who are trained to make the right decisions in order to maintain a minimal return for their clients. By committing a portion of your portfolio to ETFs you can eliminate the hassle of conducting research and monitoring market conditions before every gold investment. Instead, you simple devote a set budget to the fund and watch as it works on your behalf to protect your assets through various instruments.
The majority of professional analysts and private investors agree that investing in gold is the safest way to secure assets and ensure a minimal profit with your portfolio. However, there are a number of ways to invest in gold, either directly, through the purchasing of physical bullion and exchange traded funds (ETFs), or indirectly, through the purchasing of mining company stock and futures. To help novice investors mitigate risks we’ve reviewed the top 3 ways to invest in gold safely:
Investing in Physical Bullion
Buying physical gold in the form of gold bullion (coins, ingots, and bars) is by far the safest way to invest in gold. Unlike other gold instruments, bullion gives you the advantage of actually being able to keep the gold in your possession. You can store it at a secure, private location, or keep it in a holding box at a reputable bank. If you don’t have physical possession of your gold and the institution who is storing your holdings goes bankrupt, you may be at risk of being issued a promissory note that has no actual value. The safest way to invest in bullion is to buy ingots or bars from trusted refineries.
Exchange Traded Funds
The second-safest way to invest in gold other than buying bullion is to invest in an exchange-traded fund (ETF). These funds are managed by professionals who uphold stringent standards to ensure a minimal return for their investors and the organization as a whole. In essence, you invest your money into the fund and then the fund managers choose the most ideal way to facilitate the highest return possible. The Central Gold Trust is a good example of a fund who maintains security by holding a large percentage of their holdings in physical gold.
Allocating a Portion of your Investment Budget
Finally, regardless of which type of investment you choose it is always a good idea to only allocate a fixed portion of your yearly investing potential towards investing in gold. If your portfolio is designed with safety and stability in mind, a higher percentage of your investment budget should be used to buy gold in order to back your assets. If your portfolio is geared towards higher profits in the short-term, it would be wise to only spend 10% – 20% of your annual investment budget on precious metals of any kind.
If you were to ask a handful of advisors what the safest investment instrument is, the majority of them would probably recommend gold. Despite the fact that the annual average price of gold has been continually rising for more than ten years (a statistical feat that few commodities have accomplished) for some reason people are still not sure whether it would be wise for them to purchase some gold holdings of their own. If you’re still on the fence about gold buying, here are three reasons to buy gold in 2013:
Earn a Profit in the Long-Term
Many investors are weary about using gold as an investment instrument because they’re not confident that its value will continue to rise. After all, how much higher could the prices go, and could the increase be enough to generate a sizable profit? While there are plenty of more lucrative ways to invest a large sum of cash, few are more reliable than gold investments. With the majority of analysts predicting a gold price peak within the next 5 years it would be a wise decision to convert some of your currency to gold as soon as possible. The sooner you buy gold, the more of a profit you’ll earn when you decide to sell it.
Protect your Assets from Depreciation in the Short-Term
Converting some of your fiat currency (i.e. – U.S. dollars) into gold is a good way to protect your assets from depreciating value. The value of the dollar has been in steady decline for about 100 years, and in all probability this trend will continue until a fundamental change is made to the monetary system. However, throughout history the value of gold has risen when the value of other currency has fallen. Instead of storing your liquidity in a form of currency that is almost guaranteed to decline in value, consider the benefits of securing the worth of your assets by backing them with the reliability of gold.
Look Down from the Peak
As the dollar continues to bottom out and gold prices continue to rise, make sure you’re part of the group of investors who will be victoriously looking down from the peak instead of staring up at it wishing they would have capitalized. Although there is no unanimous consensus regarding when the price of gold will peak, most experts agree that it will happen at some point between 2013 and 2020.