Why Invest in Gold?
Of all the precious metals, gold is the most popular investment, and is generally used as a hedge against economic or political crisis. Gold is subject to speculation through the use of future contracts and derivatives. As you can see from this 10 year chart for the price of gold, it has gone up dramatically from about $300 per oz in 2002 to $1800 per oz in 2011. The rapid price increase can be attributed to several economic factors such as the 2008 stock market crash and the destabilization of the credit markets. It doesn’t help that the US has a current deficit of 14 trillion and the S&P downgraded the US credit rating to AA. The potential for further gold price increases are still there as the economy is not expected to turn around for several years. Nouriel Roubini, a professor of Economics and International Business at the Stern School of Business, New York University, who famously predicted the subprime mortgage crisis, believes that at best the economy will recover in a U-shape, meaning that the economy will not grow by more than 1% for several years. At worst, the economy could have a W-shaped recovery, one in which the economy would experience a double dip, if the Fed raises interest rates or taxes are increased.
Interest rates are closely related to the price of gold as interest rates rise, the price of gold will fall because gold does not earn interest. As the return on other investment vehicles such as bond, equities, and real estate falter, the demand for gold and other commodities increases.
- Price of Gold over 10 years
Jewelry accounts for two-thirds of the demand for gold. India is the largest consumer of gold, followed by China and the U.S.
Gold can be bought in bars at banks in countries like Canada, Argentina, Austria, Lichtenstein, and Switzerland. Coins are preferable to bars because of the reduced risk of forgery, but coins can still be fake. Gold exchange traded products are traded on the stock exchanges but carry risks because of their complex structures similar to the mortgage backed securities. Gold mining stocks are shares of a company that mines for gold. As the prices of gold increases, the profit margin of the gold mining company would be expected to rise as well.
