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 Ever since its discovery, people have been investing in gold due to its beauty and scarcity. In fact, according to the US Mint, gold is so rare on Earth that all of the gold ever mined could fit into a cube that is just 60 feet on each side. These are just some of reasons that gold continues to enjoy widespread interest as an investment opportunity.
Another important feature of gold is its liquidity. Gold is an internationally recognized benchmark of value and is held in reserve by most governments. When purchased by the consumer in the form of bullion - such as the American Gold Eagle - gold is both easy to store and trade.
Most large newspapers report the daily price and change in price of gold, so investors can easily track their portfolio's value and performance. Typically, gold prices are reported for the American Eagle, the Austrian Vienna Philharmonic, the Canadian Maple Leaf and the South African Krugerrand.
With that as a background were going to begin our discussion as to why people invest in gold.
Reasons for Investing in Gold
Gold is a proven way to preserve wealth when your local currency may be losing its value. For example, with concerns over the predicted federal budget deficit in the United States, the price of gold has been increasing sharply since around mid-2004. As international investors lose faith in the American dollar, gold typically becomes more valuable in terms of the dollar.
Gold is also valuable for things beyond investments and this is demonstrated by the ever growing demand for gold. In fact, over the past decade, consumption of gold has actually exceeded production. And since the production of gold is controlled by relatively few companies, whenever the price of gold dips below current production costs, these companies merely cease operations. This mechanism creates a stable floor price for gold.
Finally, gold is also a good way to diversify or hedge an investment portfolio since the price of gold does not necessarily move in step with stock prices.
Reasons to Avoid Gold
There is no guaranteed return on your investment when it comes to gold. Gold does not pay interest like a bond or stock dividends. The central banks of countries hold a large store of gold - a large percentage of all the gold in the world. If a country were to sell off this gold, it would create a surplus of the metal on the market, driving prices down.
In other words, since large amounts of gold are held by relatively few parties then a decision to liquidate all holdings would have an immediate downward pressure on prices. So in some ways, each of these countries has a great deal of potential market power when it comes to determining the price of gold.
Ways to Invest in Gold
At last count, there were about ten different ways to invest in gold that range from physical possession of the asset and storage through investing in gold stocks and mutual funds. Here is our complete list of the various ways investors can participate in the gold market:
Bullion, Coin and Jewelry
- Gold Bullion / Gold Bars - produced by refiners in increments that range from one gram through 400 ounces (25 pounds) worth nearly $335,000 at today's prices. Typical measures include Troy ounces, kilograms and the Tael.
- Gold Coins / Sovereign - the most popular forms of gold coins were mentioned earlier and include the American Eagle, the Austrian Vienna Philharmonic, the Canadian Maple Leaf, the Chinese Panda, and the South African Krugerrand. Many of these bullion coins are sold in quantities of one ounce bullion.
- Digital Gold Currency - many Swiss banks offer gold accounts where investors can quickly buy or sell gold just like any foreign currency. Digital gold currency accounts and the BullionVault gold exchange using a similar practice.
- Collectible Coins - also referred to as numismatic or the hobby of collecting old or rare coins. Unfortunately, it is often difficult to get an accurate appraisal of a collectible gold coin since its value is not limited to the amount of gold present in the coin itself, but other factors such are rareness and condition.
- Jewelry - the purchase and holding of gold jewelry for investment purposes is much more common outside of the United States. This is an expensive way to collect gold since a premium will be paid for the craftsmanship associated with making gold jewelry.
Certificates, Stocks and Fund
- Gold Certificates - a paper certificate indicating ownership of gold that is held by a financial institution. Gold certificates allow the investor to buy and sell gold without the worry of physically storing the gold. The Perth Mint Certificate Program (PMCP) is the only government guaranteed gold certificate program in the world.
- Gold Mining Company Stock - investing in the gold mining company itself can bring additional rewards as well as risks. For example, the price of the company's stock will move with the price of gold as well as the company's future outlook.
- Exchange Traded Funds - Gold exchange traded funds (GETFs) are traded on major stock exchanges including those located in London, New York and Sydney Australia. Gold ETFs are an easy way to exposure your portfolio to the gold price, without the bother of buying gold directly. Small commissions are normally charged for trading in EFTs and for storing the gold itself.
- Gold Mutual Funds - an alternative to creating a portfolio of gold mining stocks on your own, gold mutual funds eliminate the risk associated with a single company's performance.
- Leveraged Gold Investments - this includes the purchase of both stock options and futures. This type of investment is generally a leveraged one and therefore returns the greatest rewards to the investor to match the higher risk exposure.
Factors Influencing the Price of Gold
As mentioned earlier all investments, including gold, are influenced by the factors of supply and demand. Since large hoards of gold are held by relatively few parties the price of gold can be significantly influenced by the hoarding (buying up) or de-hoarding (selling) of gold by these mostly governmental parties.
In practicality, the price of gold is influenced more by changes in sentiment than the change in annual production (supply) or demand for things like gold jewelry.
Gold Held in Central Banks
In fact, the world's central banks and the International Monetary Fund hold roughly 20% percent of all above ground gold as official gold reserves. And European banks have been net sellers of approximately 500 tons of gold per year.
Although difficult to measure, the most influential central banks hoarding gold in the world include the United States, Japan, Australia, Russia, and China.
Investor Sentiment / Inflation
Today, investor sentiment and fears of inflation play a huge role in determining the price of gold. Whenever a crisis threatened, it seems that many investors rush to buy and hold onto gold. When paper currency appears to be at risk of inflation or even hyperinflation, investors seek to purchase tangible assets - something they can hold onto and valued.
Gold fits that last description perfectly - it's universally valued, not easily destroyed and you can hold onto it (although it's quite dense). That's why many investors consider gold as an inflation-proof investment and also helps to explain the growing interest among investors in the buying gold as an integral part of their investment portfolios.
About the Author - Investing in Gold
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