Invest in gold?
I have many friends and clients who have asked me recently if they should put their money in gold. Before we tackle that question, let’s talk about GOLD. For millennia, gold has been a barometer of financial health and the ultimate store of value. It has long been considered the best safe haven investment when all else fails, especially after this credit crunch and global recession.
So now that gold has made a second big move, moving from $600 an ounce to $900 an ounce after breaking through the $1,000 plateau last year, is the “yellow metal” still a prudent investment, or is it an investment that has already been played? outside?
Before the above question can be answered, let’s take a look at “GOLD 101”; the supply and demand for gold which in turn determines its price. Talking about the gold price, here is the interesting fact about the gold price.
gold price is
$252.80 on July 20, 1999
$255.95 on April 2, 2001 (where Bull Run began)
$1,011.25 on March 17, 2008 (career peak)
$692.50 on October 24, 2008 (price affected by the credit crisis)
$930.00 on January 31, 2009
$881.00 as I write this article…
If you have noticed the sharp drop in the price of gold in a short 6 month span from the peak in March 2008 to the trough in October 2008, it is obvious that the large drop in price was the result of the credit crunch when investors pulled money out of gold amid the decline in all other asset classes.
Looking at gold compared to other commodities, I would consider it safer as it moves independently. Gold is the only commodity with positive gains compared to other commodities in 2008.
There are many factors that affect the demand and supply of gold. Some examples will be the value of the US dollar, political risks, inflation, new gold discoveries, etc. Honestly, there is no single factor that can determine the demand and supply of gold in its entirety.
According to the World Gold Council, the demand for gold from 2003 to 2007 breaks down as follows:
Jewelry – 68% (2008 is 59%)
Industry use: 13% (2008 is 11%)
Investment- 19% (2008 is 30%)
The gold offer is as follows:
Recycled Gold – 25%
Mining production- 60%
Central Bank Net Sale- 14%
It should be noted that the central bank’s net selling on the supply side has been fairly constant after the 1999 incident in which the UK bank sold 400 tonnes of gold, causing the gold price to crash that same year. . Since then, in order to avoid such a drastic drop in the price of gold, most central banks have signed an agreement not to sell more than 400 tons of gold at a time. The current agreement of all central banks is not to sell more than 500 tonnes of gold on the market with the exception of the UK central bank. Currently, all European central banks have a 60% gold reserve, except the UK, only 40% after the big sale in 1999, which he must have regretted for many years…
Speaking of the demand side for gold jewelry, there is no doubt that India is the highest, followed by the US (but it has gone down in recent years) and then China (the demand for jewelry from China has doubled in the last 5 years)
The demand for gold for industrial use has been fairly constant over the years, although it is expected to slow down a bit amid this global recession.
What deserves attention is the increase in investment demand for gold. 30% of total gold demand in 2008 compared to only around 19% in previous years. I think these figures will continue to rise in 2009.
Shifting our focus to supply factors, there will always be people selling gold when the price starts to rise. The percentage of gold recycled as a supply tends to increase as the price of gold increases.
The good news is that gold mining production has decreased and this represents 60% of the gold supply worldwide. There are no new discoveries in recent years, as the price of gold is low and gold mining is expensive. The bad news about this supply factor is that as the price of gold accelerates further, there is a greater motivation for entrepreneurs to start mining gold again, and therefore the supply of gold increases as it becomes more expensive. They discover new mines.
The net selling of gold by the central bank has been fairly consistent over the past several years, with the US currently holding around $252 billion in gold reserves.
This brings us back to the big question: “Should I invest in gold?”
With the above analysis, it is obvious that the gold price will rise as investment demand increases in 2009. The opposite effect on the gold price will then come from the increase in gold recycling and the pursuit of new mining companies.
Given that the US dollar is likely to depreciate over the long term, as I mentioned in my second blog post, and inflation to rise in the future, gold can be a good hedge against the US dollar.
Therefore, gold is a necessary component of almost any portfolio. The problem is that the iShares SPDR Gold Trust ETF has already accumulated more gold than the rich countries of Switzerland or China. That means that any move by the masses of investors to abandon the metal will have a huge downward effect.
But knowing this significant technical risk, I would still be ready to invest if gold pulls back to the $750 an ounce level. From there, I would continue to build a prudent position no more than 10% of my portfolio, as we should see prices rise once inflation starts to kick in in 12-18 months. As inflation rises, be prepared to let gold go at prices above $1,000.
I hope you enjoy this discussion.
We’re talking to you again and have a great week ahead!
sincere appreciation,
Philip Chua, ChFC CFP FChFP
IARFC AMC B.BUS (Hons)
http://www.philipchua.com – A place to master wealth
Tweet me @phichua.