“Gold” is considered as the most essential commodity to invest. It was being used as a standard tool for determination of currency prices for various countries till 1971 Nixon shock except for Swiss franc currency that also shifted from the gold standard in the year 2000.
Gold can be invested as
• Collector’s Gold
I. Ornamental Bars
II. Numismatic coins
• Bullion Gold/Coins
I. Gold stored at home
II. Safe deposit boxes
III. Vaulted gold
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• Gold Backed Securities
I. Exchange traded funds
II. Exchange traded commodities
III. Physical gold funds
a) Open ended funds
b) Closed ended funds
• Securities not backed by gold
I. Index Trackers
a) Structured Products
Gold Mining Companies
• Mining stocks
III. Minor Producer
IV. Major Producer
• Investment Funds
I. Mining ETF
II. Mining Mutual Funds
There is a plethora of sectors where individuals can invest and in the portfolio of every individual investor the contribution of gold may vary from 5% to 25%. Investment in gold does not guarantee a regular dividend or yield as investment in bonds or equities would, but can be used for:
• Maintaining the purchasing power of money: Whenever the price of the commodity increases, the investor’s real purchasing power should not decrease.
• Minimizing losses during inflation/deflation: Whenever there is a rise in the prices of essential commodities and vice verse, an investor may protect itself from the inflation effects because of the presence of gold in its portfolio.
• Economic crisis: During recession & depression, when even the price of other essential commodities may fall, there gold acts as a safe asset because its demand and supply is not affected by it.
• Banking crisis: Gold can act as a protective shield if the deposits in banks are in threat.
• Currency devaluation: Gold can also protect an investor from the risk of devaluation of its respective country.
• Market downfall: Effects of rise and fall of stock prices will also not have a negative impact on investor if gold is present in his portfolio.
Price of gold depends upon its demand and supply, value of US dollar and reserves held by central bank (in the form of gold) and it is valued in troy ounce. One troy ounce equals 31.10 grams. But price of gold does not move in sync with the other commodities.
An investment in gold can provide following benefits through:
• Hedging: In the portfolio of an investor if gold is negatively correlated with any other asset, i.e., with the increase in price of gold, the price of the other asset may fall and vice verse. So, the negative effect may be chalked out in the portfolio and the purchasing power of an investor does not get affected.
• Risk Diversification: If the assets in a portfolio are low or uncorrelated, then the risk of reduction in the price of total assets may be reduced to some extent.
• Speculation: Predicting rise in prices of gold by analyzing the trends and charts (like moving average), the investor may buy more quantity of gold or increases its share in portfolio. This would generate significant returns if market prices move as per investor’s prediction.
Investment strategies can be made on the basis of fundamental and technical analysis. Fundamental analysis helps an investor in buying the quantity of gold by studying the economic and industry conditions to the financial condition and management of companies. In technical analysis, past prices and volume is taken into consideration to predict future prices and trends. As explained by Deutsche Bank, “There are rising stresses in the global financial system; in particular the rising risk of a U.S. corporate default cycle and the risk of a sharp one-off renminbi devaluation due to the sharp increase in China’s capital outflows. Buying some gold as ‘insurance’ is warranted.”
Though great advantages are available for making an investment in gold but they still contribute a small percentage in the portfolio of majority of small investors, where major share is occupied by equities, debt and other money market instruments, real estate and other alternative instruments. Gold has provided more superior returns than equities. Gold should be considered as a strategic long term instrument.
Changing trend of gold prices
Gold was being traded at 554.45 USD/oz on March 2006 and rose to 1108.00 USD/oz as on March 2011. Now it has increased to 1231.70 USD/oz as on March 2, 2016. Gold is expected to trade higher because of the negative interest rates offered by the central banks in European Union, Japan and Sweden. Despite a strong increase in personal income, consumer spending, PCE (Personal consumer Expenditure) Inflation and US GDP growth rate, prices of gold is still increasing. While the US dollar and interest rates are important factors in explaining the price movement of gold, as mentioned, they are not the sole components. Secondly, gold’s positive portfolio attributes (low correlations to other asset classes) have historically remained consistent through time. Value of gold has reached a very appealing level. Thus, a rising trend is being forecasted in the prices of this yellow metal over the coming years.
Below is the graph depicting the past performance of gold.
Gold prices from past 26 years, 2011 a spike in gold price went to an historic high.
Gold Price US dollar/Oz, See the gold prices from past 10 years.
Gold should be a staple of every investor’s portfolio in an Gold IRA. During times of crisis, when countries default and money loses meaning, gold still retains and sometimes even increases in value. Gold is the currency of last resort. It is imperative that an individual investor should place a substantial amount of his portfolio in Gold to earn handsome returns in the long term and also have insurance for the rainy times.
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