Something exciting recently happened to the gold spot market: it reached a 28-year high of $842 per ounce. While institutions are dumping equity investments like there is no tomorrow, a proportion of their free money is being piled into gold. By the nature of the stock market, this is pushing its value steadily higher, creating dramatic money-making opportunities for private investors willing to speculate.
Before investing, it is prudent to understand how the gold price is influenced. There are three broader factors that are coming into play right now.
1. The Weak US Dollar
Think of gold as a currency. Except that unlike paper money, its value can’t be debased by creating more; there are limited supplies of gold on this planet. So, when the value of money goes down, it becomes more expensive to buy gold, and its value goes up.
The US dollar itself has been waning against the Euro and Sterling for the last two years. But more recently, the US trade deficit has worsened and with the slowdown of the housing market, the greenback has suffered a lack of support. The dollar recently fell to 76.014 on the Dollar Index (the lowest reading since it was created in 1973). It is truly entering new territory. This makes gold more expensive.
2. The Equity Sell-Off
Weak economic data coming out of the global financial centres is causing investors to flock toward gold as a “safe” investment. Since the US sub-prime mortgage crisis has impacted the bond and equity markets, many investors have been selling riskier stocks. Cash does not provide much growth, however, so the appeal of gold for capital gain becomes clear.
3. Emerging Industries
The rapid development of China and India is causing a commodity boom. The sudden surge in demand for commodities like iron and steel has driven spot prices higher, and other metals are following suit. This inflates the price of gold, too.
How to Get Gold Exposure
Gold Coins – There are several types to look for; rare and antique coins or newly minted, including Brilliant Uncirculated and Proof coins. Individual coins can be worth thousands or even millions in extreme cases. They can be purchased from dealers and mints online, and should be bought when they are first issued.
Gold Bars and Bullion – The world’s professional gold market is centred in London at the London Bullion Market Association, and trades in 400-ounce bars costing around $330,000 each. However, bullion merchants buy and sell to private investors for as little as £50 over the counter.
Gold Funds – By trading gold-backed securities, there is no need to worry about storage and security of physical gold. The World Gold Council has an exchange traded fund, Gold Bullion Securities, which trades on the London Stock Exchange. It charges a small management fee per year. There are also traditional investment funds which are dedicated purely to physical gold. Mining shares are not recommended as they come with a larger degree of risk.
Gold Futures – This is not for the faint hearted; about 90% of newcomers who invest in this way lose their money. Of course, a few have become millionaires. It involves making a legal contract that binds the investor to buying a fixed amount of gold at a pre-determined price in the future. Any profit will be made over the difference between the future and the current price of gold.
 |
