In times of economic crisis, it makes sense to fall back on time-proven investing strategies. Gold is a standard form of investment that has proved its worth again and again, even in unstable markets. Historically, the price of gold has remained stable compared to other investment vehicles that tend to fluctuate more drastically. And its value has held up even as worldwide currencies have fluctuated, due to more consistent prices and returns. For centuries, the overall appeal of this precious metal has been based on its varied usage, durability and beauty.
We often hear how important it is to properly diversify our investment portfolios. Diversification strengthens our investments — maximizing returns while reducing risk. Since gold is not affected by the same factors that might drive let’s say the price of GE stock down, investing in this commodity helps stabilize your portfolio. The value of this precious metal is rated high in most if not all markets around the world. According to the World Gold Council, East Asia, the Indian sub-continent and the Middle East accounted for 72% of the world’s gold demand in 2007; 55% of the demand is attributed to India, Italy, Turkey, China and the USA. Gold’s demand for use in personal electronics, dental devices, various other industries, and its potential in areas of scientific research help determine its value.
Investing in gold can be relatively easy. However, the type of investment vehicle you choose is dependent on your tolerance for risk. As you get into riskier types of investments, the dynamics of the venture can get more complex. The simplest way to invest in gold is by purchasing jewelry, gold coins, bars or certificates. Gold oriented funds and derivatives are riskier due to the different factors affecting their value.
Like James Bond’s arch-nemesis Goldfinger, you might find there’s no substitute for actually purchasing and owning gold. While this is the safest way to invest in gold, it is not without risk. Gold jewelry can be bought in any jewelry store, but be aware of where you shop for it. In some cases, if you buy from unscrupulous vendors, you might be paying for a pure gold jewelry but instead getting a lower quality piece made from recycled gold. Gold bullion coins can be bought directly from government authorized dealers. The United States Mint, which is part of the US Department of the Treasury provides a list of authorized dealers through its website. The World Gold Council states that the market value of these coins is determined by the value of their fine gold content plus a markup that varies between coins and dealers. Gold bars can be purchased through a number of accredited manufacturers. For more information, go to Gold Bars Worldwide. A 400 oz gold bar can be expensive. The price can vary depending on the price of gold the day you buy. If the price of gold is, for example, $746.00, that would mean the price of the bar can be close to 300K. Actually owning gold, either in the form of gold bars or jewelry can be a security risk. You may be better off with a gold certificate, which provides a more secure way of owning gold. Gold certificates are sold by banks. The certificate confirms the quantity and ownership of the gold, but the actual gold stays in the banks’ vault.
If you are willing to take more of a risk, you’ll want to consider gold-oriented funds. They are much more complex in that they are a collection of investment vehicles such as mutual funds, open-ended investment companies (OEICs), closed-end funds and unit trusts that invest in the shares of gold mining companies. Investing in this form is different than investing in gold bullion coins in that the increase in their value is dependent on how well the companies does, market expectations on the future price of gold and cost of mining the gold, among other factors. Information on these types of funds can be acquired through your investment professional.
Derivatives are riskier yet. Derivatives come in the form of structured products such as forward contracts, gold-linked bonds and structured notes. Gold forward contracts are agreements to exchange gold at an agreed price at some future date. Gold-linked bonds can be purchased through bullion dealers and investment banks. This type of bond has a yield, principal protection and exposure to gold price fluctuation. Structured notes involve the purchase of put/call options, which are products designed to generate value based on the investor’s expectation of market performance.
Whether or not you decide to invest in gold and make it part of your investment portfolio should be based on your careful consideration and ability to tolerate risk. It’s important to keep in mind that whatever money you decide to invest, this is money that if you lose it, you will be able to live without while managing your household expenses. Remember that investing can be a gamble.