There are now advertisements everywhere claiming that gold is the ultimate investment. Let us dig the facts. Like any commodity or “real” asset, the valuation of gold is straightforward. Purely…
There are now advertisements everywhere claiming that gold is the ultimate investment. Let us dig the facts.
Like any commodity or “real” asset, the valuation of gold is straightforward. This is purely a relationship between supply and demand, and this is only one point. But commodities are different from most traditional investment assets. When interest rates are taken into consideration, stocks, bonds or real estate will give you cash flow of current and future value. Commodities just exist. They have no cash flow, so prices are based only on what others think they are worth at a given time.
Gold investing is not for everyone
For example, if a miner can mine gold from the ground at a price of $500 per ounce (cost), as long as he can sell it at a price higher than this price, he can continue to produce gold. If the price of gold falls below $500, it will not be worth it to continue mining. He stopped-other miners may have stopped-and the decline in supply caused prices to eventually rise.
This is basic economics. Let me add a little bit of trivia. Did you know that all the mined gold in the world will only fill a 6 to 7 foot high football field? We are talking about a fairly small market here. But this is only related to the commodity production environment.
Demand is the driving factor. Gold has always been traded as a currency, not as a typical commodity (such as oil, wheat or copper). This is a fear deal. When global fears rise, gold is a hedge against negative sentiment in the capital market.
We have witnessed these years. When stocks, real estate and other commodities rose, US Treasuries and gold fell, and vice versa. Investors turn to gold in times of risk because of its “store of value”. They cannot lose gold. But is this true?
Traditionally, gold has been used to hedge against inflation. In addition, there is also an obvious reverse relationship between the relative strength of the US dollar and the recent gold price. If the Fed’s current monetary policy either raises the inflation rate or weakens the US dollar, the price of gold may rise further. In 2010, it has risen by about 30%.
Colorado Springs resource management expert and president of the Colorado Resource Association Jim Komadina (Jim Komadina) pointed out that the Asian Central Bank and Chinese consumers have particularly strong demand for gold. He said: “Supply and demand fundamentals alone will support the continuous rise of gold prices for several years in office.
Should You Invest In Gold Right Now?
As for the “cash to buy gold” phenomenon, the most important piece here is the haircut: what you get, not the actual value of your gold. I don’t have any personal experience, but I take the liberty to say that gold being placed in the mail is unlikely to generate its true value. You pay for convenience. If you really want to sell your gold jewelry, give it to a reputable reseller and collect a few offers to find out that it is truly worth it before you complete a transaction.
In the final analysis, when considering gold as an investment, you must break through folklore. Gold has better value than high-risk capital market assets. But in reality, gold is a volatile market. It has gone through decades of peace and recently its value has declined. The risk of buying gold now is greater than it was decades ago.
If you want to join the frenzy of buying gold, investing through exchange-traded funds is safer than buying gold.