The Volatility of Gold, Gold as a Investment Opportunity
We are often asked whether gold is still a good place to invest. There are affecting issues here that investors need consider.
The Acceptance by Investors That ETF’s are an Acceptable Investment
Due to world currency instability and fears of debt crises spreading, many people have been seeking a safe haven to protect their assets. Every day, one hears pundits advising investors to seek the safe haven of gold.
Without going through all the rational behind the reasoning, suffice to say that gold has been a historical place to put your money to protect yourself against massive inflation, confiscation, bank failures, and more.
When currencies failed in past years, people who had invested in gold, still had assets, whereas people holding currency saw their purchasing power evaporate.
As demand has grown in recent years, the derivative market created vehicles to allow people an easier route to invest.
Buying Real Gold – the Metal
When you buy real gold, it is heavy, it is difficult to protect against theft, it costs money to store, when you buy or sell it, you don’t get real market prices. Instead you pay commissions and middlemen.
All of this makes the metal gold an awkward investment.
ETF’s
So investment bankers and traders came up with something far easier for investors to buy. They created a Fund that would buy gold, and the investor could buy the Fund only. All matters were taken care by the Fund, and the investor received a piece of paper or electronic confirmation that he/she owned something.
That something that they owned, was either a Fund that itself went out and bought real gold with the money investors invested, or it was a Fund that bought some other derivative of gold that professed to be as good as gold (if you pardon the pun).
Now most investors own ETF’s or Funds that claim to either directly own gold, or claim to own the equivalent of gold, whereas only a few actually own the metal Gold.
The Possibility of a Major Move in the Price of Gold
Consider why the price of the metal has risen so dramatically. It is a matter of supply and demand. As investors put their money into Funds, the Fund had to use the majority of that money to actually buy the metal, or to buy some derivative that professed equal value and safety.
The result was many more investment dollars could go into buying gold, and therefore much more gold was bought and taken out of circulation by these new ETF’s and Funds.
The result – the price of gold moved up very quickly.
What Happens if There is Some Currency Fear in Greece or Italy, or Elsewhere
Say a debt crisis explodes in Europe over the failure of Greece or any other country to meet their debt obligations? This is a question posed daily in the financial newspapers.
The answer is simple. Many more people will seek the safety of gold. The price of gold will rise dramatically.
There are a great many writers and financial ‘analysts’ who are predicting precisely that this will happen. If it does, and if you bought gold, your decision to buy gold will make you a lot of money.
What Happens if There is an Agreement on Debt in Europe
Well, investors will all of a sudden start to feel more secure. When they do, they will look at their gold investment, which will not have moved up in a while, and on which they are losing money, because a Fund has many expenses that have to be paid out of the Fund. So the Fund will gradually diminish in value.
When this happens, the investor will likely sell some or all of their holdings in order to buy other investments that pay dividends, or have a chance of capital appreciation.
In order to allow the investor to sell his Fund shares, the Fund must raise money to pay out the investor, so the Fund sells some gold.
The exact same market movement will occur as happened when people flocked to buy gold, except in the reverse. The value of gold could plummet and quickly. Remember that in the market what goes down in value, does so very quickly, while going up is a slow protracted process.
The Great Gold Gamble
We do not know which event will occur. We do not know if gold will rise quickly, or fall even quicker. It all depends on world events which are not predictable.
Anyone that claims to know, is guessing.
So if you are a gambler, and like to take enormous risks, buy gold now.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
