Why invest in gold when price is so high : Bad Credit Advisor

Why invest in gold when price is so high

Why invest in gold today? Gold price is hitting $1,195 USD in Europe and Asia right now and has quadrupled in the last 10 years. New York gold spot price closed at just over $1,193 today, almost $24 up. With gold excellent performance over the past 9 years, many of you think that the price is too high and a huge drop is coming. Huge does not mean a drop in $50 to $100 range, but rather something close to $300 or even $400 per ounce of gold. Of course, why invest in gold then? It may just go the way oil went. Well, we think, there are plenty of factors that will keep gold going for a few years at least and then some. Important note, you do not have to buy today or tomorrow with the gold price so high. Gold is quite overbought right now and most definitely will come down, but when and by how much is the topic worth of separate detailed entry.

First factor is growing awareness of the need to diversify. Asset allocation is an important aspect of any investment strategy. You invest in gold to further balance your portfolio to maximise returns and minimise risks, as the gold price is not driven by the same factors that drive the performance of other assets. Gold should and will be an important addition to huge number of investment portfolios that still typically contain only 3 asset classes - stocks, bonds and cash, to protect the portfolio against fluctuations making it more robust and less volatile.

Second, ongoing demand for gold investment comes from diverse sources, both geographically and sectorally, helping to maintain gold price as well as robust demand. The point I want to make is that there are still many of untapped sources that will keep gold rally for the next several years. Gold demand increased by 79% between 2003 and 2007, and by 158% between 2001 and 2007. Moreover, most spending on gold is discretionary. 68% of total identifiable demand over the 5 years to December 2007 came from the jewellery sector, with a further 19% from investment and 13% from industrial demand.

Third, the answer to why invest in gold can be found in 5 words - gold keeps its purchasing power - the value of gold, in terms of the real goods and services that it can buy, has remained largely stable for many years. For example, in 1900, the gold price was $20.67 per ounce, which equates to about $503 per ounce in today prices. From December 2004 to December 2006, the actual price of gold averaged $524. So the real price/purchasing power of gold changed very little over a century that was characterised by many geopolitical shocks and wild currencies. Thus, over the long term gold maintains its purchasing power during both inflationary and deflationary periods.

Fourth factor is the U.S. Dollar. Gold can be effectively hedged against fluctuations in the US dollar. If the dollar appreciates, the dollar gold price falls, while a fall in the dollar relative to the other main currencies produces a rise in the gold price. With the U.S. government printing money 24 by 7 by the truck load inflation is just a matter of time.

Fifth reason to invest in gold is that it is significantly less risky than other investments that always carry three main types of risk
- the credit risk when a debtor will not pay
- the liquidity risk when the asset cannot be sold as there are no buyers
- market risk when the price falls

Gold does not carry a credit risk as it is no one liability unlike a treasury bond, or a company stock. And unlike currencies, the value of gold is not affected by the economic policies of the issuing countries or undermined by inflation or deflation. Gold liquidity is also high with many sellers and buyers, from online exchanges and dealers, to your brick and mortar neighborhood coin shops and jewellery stores, to manufacturers of industrial products.

While gold does carry market risk, many of the downside risks associated with the gold price are very different to the risks associated with other assets, again as we said before, making it an ideal portfolio diversifier.

If you are still having any doubts as of why invest in gold, ask yourself what if,

- inflation / hyperinflation returns
- persistent economic crisis only gets worse
- uncertainty and fear lead to chaos and rioting
- stock markets goes nowhere or goes way down
- the money printing of the many governments proves futile
- government takeover of the economy increases even more
- the value of the U.S. dollar takes a major fall
- the current recession/depression will last years

You may never have enough gold then. So invest now, gold may just quadruple again.

Wed Nov 25, 2009 07:11PM by Tony | More in Gold Investing | Comments (0)

Helpful Links

Syndicate

Subscribe in a reader