Investors may buy gold for a variety of reasons: among them include a desire to diversify their assets; to hide wealth from tax authorities; for reasons of political belief (eg. Libertarian); or out of fear of an economic depression or other serious crisis.
Methods of investing in gold
Investment in gold can be done directly through bullion ownership, or indirectly through certificates, accounts, spread betting, derivatives or shares. Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the total global gold supply versus demand.
Investment in gold can be done directly through bullion ownership, or indirectly through certificates, accounts, spread betting, derivatives or shares. Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the total global gold supply versus demand.
Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. Others point out that total mine production is only about 2,500 tonnes each year, leaving a 1,300 tonne deficit that must be made up by central bank or private sales. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes.
This makes gold very different from almost every other commodity. Stock analyst Jim Jubak recently chose gold as one of his "stock" picks for the next 12 months giving it a price target of $870 per Troy ounce by July 2008.
Gold versus stocks
The performance of gold bullion is often compared to stocks. They are fundamentally different asset classes: gold is a store of value whereas stocks are a return on value (i.e. growth plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. Since 1800, stocks have consistently gained value in comparison to gold due in part to the stability of the American political system.
This appreciation has been cyclical with long periods of stock outperformance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s.
The ratio peaked on January 14th, 2000 a value of 41.3 and has fallen sharply since. William Anton III wrote in the 2004 issue of Jefferson Coin and Bullion "...downward movement in the Dow/gold ratio is unlikely to stop precisely at the mean trendline. The extreme distension of the the 90s will likely overshoot to the opposite extreme in the current cycle."
In November 2005, Rick Munarriz of Motley posed the question of which represented a better investment: a share of Google or an ounce of gold.
In November 2005, Rick Munarriz of Motley posed the question of which represented a better investment: a share of Google or an ounce of gold.
The specific comparison between these two very different investments seems to have captured the imagination of many in the investment commuity and is serving to crystalize the broader debate. At the time of writing, a share of Google's stock and an ounce of gold were both near $700.
On January 4, 2008 23:58 New York Time, it was reported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closing at $859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges. On January 24th 2008, the gold price broke the $900 mark per ounce for the first time.
On January 25, 2008, gold and platinum prices climed historic highs of 919.80 and 1,634.50 dollars per ounce, respectively (London Platinum and Palladium Market).
