Gold is the most popular of all the precious metals for investors; who generally buy gold as a store of value (safe haven or hedge) against political, social, economic or fiscal (currency-based) crises, which include investment market declines, inflation, war, and social turmoil. However, savvy investors also buy gold during times of economic growth for portfolio diversification and financial gain.
What influences gold prices?
Just like all commodities, the price of gold is influenced by supply and demand. The major difference is most of the gold ever mined throughout history is still available and can potentially come back onto the market for the right price, therefore hoarding and disposal plays a much larger role in availability. That means the price of gold is mainly affected by changes in sentiment, rather than changes in annual production, since there is already such a huge quantity of stored gold. The World Gold Council’s report shows recent annual mine production of gold close to 2,500 tonnes, of which approximately 3,000 tonnes is used for industrial, dental and jewellery production, with retail investors and gold funds on worldwide exchanges responsible for purchasing an additional 500 tonnes. This means annual demand for gold from industry and investors exceeds annual mine production by 1,000 tonnes.
When bonds, equities and real estate are performing poorly, as they are now, investors typically seek a way to offset losses and risk. That means an increase in the demand for gold and alternative investments such as commodities. One historic example would be the period of Stagflation (a period of rising prices and unemployment, without growth in business activity and consumer demand) that occurred during the 1970’s and which led to an economic bubble forming in precious metals.
Since governments introduced fiat money as a replacement to gold and silver coins and bank certificates, if people fear their bank will fail, a Run On Bank (ROB) might be the result (when account holders rush to their bank and demand their savings in full) for fear they might lose part or all of their savings. This happened in the U.S. during the stock market collapse that lead to the Great Depression in the 1930’s. This lead to the creation of Executive Order 6102, which imposed a national emergency and outlawed the hoarding of gold by U.S. citizens. The order has since been withdrawn, but a similar climate exists today with the failure of several banks worldwide since the collapse of the housing and credit markets. Currently, if there is a ROB or collapse, the Bank of Canada only insures accounts against theft and institutional bankruptcy up to $100,000.
The IMF and central banks
The International Monetary Fund (IMF) and central banks also play a significant role in gold prices. In 1999, the United States, Europe, Japan, Australia, along with the Bank for International Settlements and the International Monetary Fund, created the Washington Agreement on Gold (WAG) to limit gold sales by its members to less than 400 tonnes per year. As such, by the end of 2004, central banks and official organizations held 19% of all aboveground gold as official gold reserves. This has resulted in a steady rise in gold prices, as non-member states such as Russia have expressed interest in increasing their gold reserves, and China (which currently only holds 1.3%) announced it was also looking to improve the returns on its official reserves.
War and social unrest
Historically, there have been several instances when a sudden war or conflict arose and assets were seized or currency became worthless. People who have experienced these horrible times have the foresight to invest in a solid asset that can always buy supplies and secure transportation. For this reason, in uncertain times when war is a distinct possibility, the demand for gold always rises.
Why you should buy gold
There are two reasons why you should invest in gold:
1. Portfolio diversification as a hedge against economic, political or monetary crises
2. To increase your wealth by financially gaining from increasing gold prices.
Gold prices on the rise
Gold has consistently outperformed the Dow Jones Industrial Average (DJIA), which between July 2003 and November 2006, increased by 35% while gold increased by 84%. Also, from 2002 to 2008, gold rose by an amazing 350%.
In a featured article on Motleyfool.com, columnist Rick Munarriz investigated which investment was better, one ounce of gold or one share in Google. At the time, both investments were approximately $700. Then on January 4, 2008 it was reported that by the close of trading in New York, an ounce of gold outpaced Google’s share price by 30.77% – gold closed on U.S. market exchanges that day at $859.19 while Google closed at $657.
More recently, on January 24th 2008, gold prices broke the $900 mark for the first time and topped $1,000 for the first time ever on March 13, 2008 as recession fears and banking collapses which still loom over the global economy.
How do I invest in gold?
The traditional method of investing in gold is by buying bullion (gold in its bulk form), and trading it on commodity markets.
For investors, the greatest value in purchasing bullion is the same as purchasing any other commodity in bulk – rather than after it is processed and rendered into individual smaller units. This is what makes bullion more affordable than minted coins, because investors can take full advantage of buying pure gold in bulk quantities and avoid the added costs of minting and processing.
Bars or ingots
Precious metals come in bars, which can be delivered directly to your home for storage in your own safe, or in a vault on your behalf. Due to the many difficulties of transporting, storing and verifying pure gold bars, a popular option available to our clients is for RCM to hold your bullion in one of our international vaults where it remains in ‘good delivery bar’ form. Trades can then be settled instantly, giving you immediate liquidity of the asset.
Your RCM gold account gets you even more
As an investor with RCM, when you see the precious metals on the rise, you can leverage your position to borrow money against your existing precious metals assets to purchase even more on account.
When is it a good time to buy?
The best time to invest in gold is now. Demand for gold is increasing disproportionately to gold production by over 1,000 tonnes each year. And as a global recession looms over the worldwide economies, the demand for tangible assets is on the rise. Warren Buffett, George Soros, and Peter Lynch have all advised investors to diversify their portfolios to spread risk and maximize growth potential by including precious metals in their portfolio.
It’s time to invest in a proven asset that has outperformed the stock market and increased in value by 350% since 2002.