The standard assets that people invest in are typically stocks and shares, bonds, cash and sometimes real estate. There are also mutual funds related to these asset classes. Where does gold fit into this picture? Gold traditionally was only used to hedge against inflation or when there was economic crisis in the world. The last time when gold had a large increase in price before now was in the 1970’s. This period has been characterized by world turmoil, high financial debt and high inflation.
Gold is usually thought of as a metal which is used in jewelry and ornaments, but this is only a part of the picture. These uses are an attempt to classify gold by what it physically does versus what it represents. The reason why gold is used to hedge inflation or economic occasions is because gold is money. If you need proof of this, understand that the biggest buyers of gold have been central banking institutions. They are not using gold to make jewellery, but to backstop their particular currencies. Lately, they have been net customers after many years of being net sellers. When gold is out of date as a currency, the central bankers would not be interested in gold today.
Gold is the one of the longest running currencies in the history of commerce, and it was used in several cultures to represent wealth. This particular concept is still true today, but it has been obscured by the fact that the US dollar is now a representative currency or even reserve currency for that wealth. You have no doubt heard of the “gold standard”. There was once a time when all of the currencies of the world were exchanged at a fixed rate to gold. Gold was essentially the base currency for the world, and then all of the other currencies like the pound, yen, dollar and franc were compared to the value of gold. Only recently was the US dollar used as a proxy with regard to gold. This was done at first since the US government had a sufficient quantity of gold to back up the representative value of the currency. This is like saying that the US dollar was an invoice that represented real gold kept in a government vault. When the money was taken off the gold regular, the receipt now had simply no gold backing it up. Instead, the power of the US treasury to tax people or generate value is where the dollars’ worth comes from. Acted in this idea was simply a matter of trust that the government, or whoever issued the currency would constantly create value that the currency device represented. At the time that the gold standard was disabled, the national financial debt and deficit were not as big as today. At the present time, the debt has grown so large that there is talk about authorities bankruptcy.
What does this have to do along with your investing? Gold should not be treated like any other industrial metal, but more like currency. Like other currencies, what gold will buy in your bucks will change every day, similar to how many Euros you can buy with your dollar. This is one particular reason why gold is volatile, and contains risks like any other investment.
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Exactly what would affect the price of this gold? There are always many factors, but in conditions of a currency, its purchasing strength is the key variable in understanding the precious metal price. Since currencies are in accordance with other currencies, the way to look at gold is – how much of it is there compared to the other currencies of the entire world? Since all of the other currencies are based on trust, and currencies can be released in any quantity at any time, this is a clue as to how to proceed. Gold is expanding every year due to mine production, but this is relatively slow compared to the issuance of other currencies, which are basically issuing new debt.
I understand the story – how do I invest in it?
The gold I have been talking about up until now is the metal itself. There are many ways to invest in gold – gold stocks, gold indices, and buying gold directly — either in gold bullion (bars or wafers), coins or purchasing access to physical metals through precious metal dealers or funds. If you understand the idea that gold is a currency, probably the most straightforward way to capture that pattern is to buy gold as a metallic.
If you buy access to gold metal through a fund, you want to find something that paths the price of gold as closely as it can be. There will likely be small differences between the fund and the gold price because of fees, issuing fund units, or even short term trading patterns which usually balance out in the long run. A gold fund can be an exchange traded fund that imitates gold, or a gold trust that actually buys the gold and keeps it for you. The other way to purchase gold directly is to buy gold physically. This would be done through a precious metal coin dealer, gold bullion seller or a currency dealer if they offer in physical gold. Many of these dealers have sprung up in the last couple of years so make sure whoever you go to has history and a good reputation. The risk of buying gold bullion lies in where to store it, and the possibility of loss or theft. You can put gold in a safety deposit box at the bank or have someone store it for you for a fee, but then you should trust whoever you store the precious metal with. There can also be expensive costs to buy gold so you need to look around like everything else that you buy.
If you want to invest in gold through shares, you are looking for companies that can actually produce precious metal and take advantage of a very high cost, or shortages of supply due to more demand for gold. This means that gold explorers and small minors may not serve the purpose too nicely, unless you are investing in gold as well as the company as well. The risks in buying the gold stock are different than purchasing gold bullion due to market aspects like company management, gold supplies, geopolitical risk in mining places, issuing new shares, company expenses and so forth.
You can also buy a mutual fund of gold shares. The risk plus reward of this strategy is very just like buying individual shares, but you can shift across more gold companies. Drawback is that the management fees for a mutual fund are typically higher than buying shares directly.