Reasons for Investing in Gold
Some investment gurus, such as Peter Schiff, also think that gold is the purest form of money. In many sense this is true, stemming from the fact that money in Western world was tied to the price of gold prior to 1971, when the gold standard was abolished. When a country's money is not tied to anything, the money is called a fiat currency, and there are several problems associated with such monetary base, including the fact that fiat money allows the governments to print money and create inflation without restrictions. In terms of investment vehicle, much of gold's value comes from the fact that it has retained value throughout times, making it an inflation hedge in times when fiat money is losing value rapidly. Beyond its role as a purely speculative instrument to retain value, gold also has demand coming from its uses in jewelry and its rare uses in electronical components. Of these, the wedding season in India has been stated as one of the most important indicators of real life demand for gold. Major producers of gold in the world include South Africa and Russia, whose mines production is considered an important indicator of supply of gold in the market. If you're interested in investing into gold, you have several ways to do so. The way many recommend is to invest directly into gold, meaning physical gold. Another way is to invest into the gold mining companies, but this method has its own problems, mainly stemming from the fact that if the company has problems that are not related to gold, you are also buying into these aspects of the company, not just gold itself. There are also funds that have diversified positions in gold mining companies and Electronically Traded Funds that follow the money of gold, making it easy to invest into your view of where gold price is going. Because the real life demand for gold is often not the most important factor in owning gold, this leaves the door open at times for erratic price action. For example, central banks that own huge amounts of gold may decide to sell their ownings at a short timeframe, putting downward pressure on the price of gold even though the market realities would suggest otherwise. There is also a case for decreased production of gold, as production in some of the world's largest gold mines, especially in South Africa, is either flat or declining. Any new gold mine opened or closed affects the price of gold through supply and demand equilibrium. |