If the state of the economy and commercial messages about gold investing have piqued your interest, it’s important to do a little research before taking the plunge.
Investors all over the world are choosing to diversify their portfolios with gold to hedge against inflation and a host of other economic ills. Like any other commodity, gold is a great investment for some, but may not be advisable for others. That’s why it’s so important to do your home work before buying your first gold coin, bullion bar or investing in an ETF.
Gold, like any other commodity fluctuates up and down. Various market fundamentals and other influences can send the price of gold up or make it come crashing down. For the past four years, gold has steadily gained in price. Gold recently hit a peak of $1,300 per ounce before retreating slightly back. Just four years ago, gold was only worth about a third of what it’s worth today.
Gold tends to do the opposite of what the rest of the economy is doing. When stocks and other investments are growing in value, gold is usually declining. When these investments are struggling, gold increases in value. This negative correlation isn’t as pronounced as it once was, but the direction of gold remains a pretty powerful indicator for the overall economy. This effect is caused by investor sentiment. Investors see gold as a safe harbor when times are rough, so when the overall economy sours they buy gold, driving up the price. When investors feel more confident, they invest in other things, reducing the demand for gold.
Because gold tends to be bought in times of crisis, many countries have banned gold ownership in certain periods to get people back into the market. For example, gold bullion ownership was banned in the U.S.for several decades.
Supply and demand have a big impact on the price of gold. Virtually all the gold ever mined is still available for trading, and not much gold is produced annually. The world’s largest gold producer is currently South Africa.
The habits of central banks can have a big impact on the price of gold, as nearly one-fifth of all the world’s gold is held in governmental reserves. For example, the 10-year Washington Agreement on Gold set limits on how much gold some of the world’s largest gold holders could sell each year. Analysts believe this agreement helped increase the price of gold from 1999-2009. The agreement was recently renewed, but with an even tighter sales limit. Also, mass buys from China and India are believed to be pushing the price of gold up.
Monetary policy can also have a big impact on the price of gold. Inflation often sends investors clamoring for gold, resulting in higher demand and higher prices.
There are a variety of ways investors can diversify their portfolios by investing in gold, with the simple purchase of gold bullion being the easiest, and including more complicated products like gold ETFs or futures.
Before investing in gold, you should consult with your financial planner to determine if gold is appropriate for your investment needs and goals.
