Whats Going On With Gold?

by James on September 25, 2012 · 2 comments

Folks,

Every now and then we like to give you a market update on whats happening with various sectors of the economy.  Well this posting is an update on whats going on with gold.  There are a couple of relevant facts we’d like to get across.

1) The price of gold remains on a long term uptrend.  Demand is largely driven by China and India, as well as by increasing purchases by central banks and high net worth individuals as a response to quantitative easing in some developed economies (1).  The price is also driven by increased retail purchasing in part fueled by fears of quantitative easing.  So if you are investing in gold bullion, or any kind of security that trades on the value of gold, including mining stocks or ETFs, you might do well over the next six months.

2) Thinking has been changing regarding the role of gold as a part of retail portfolios. For most of the 1990s and 2000’s it would be difficult to find a substantive discussion of gold in most of the personal finance literature.  This however, seems to be changing. In particular a recent 2011 report from Oxford Economics suggests that the following findings apply to consumer ownership of gold.

* Lack of correlation with other assets makes gold useful for stabilizing the value of a portfolio.
* Gold’s optimum share of a long-term portfolio is around 5%.
* Gold’s optimal share rises in a more inflationary case and equally rises for low risk investors in
a lower growth and lower inflation scenario.

The report is listed here if you want to check it out.

3) The question of whether gold is better understood as a commodity or as a currency is still an open one.  The question doesn’t mean a whole lot for individual investors, since you’ll likely be getting your gold either through an ETF or by holding the physical bullion, but it does suggest that the very long term (e.g. over a couple of hundred years), your return on gold will probably be a bit above holding cash. This this might matter if you’re looking at a 50 to 60 year holding period for your investments.

4) Finally, retail buying and selling of gold hasn’t appeared to have changed very much. If you are looking to sell your gold fast, you might consider a number of online services, such as ebay or craigslist.  Local coin dealers or collectors can also be useful resources – although coin dealers often won’t give you the market value of your gold.

Best,

James

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{ 2 comments… read them below or add one }

1 DC @ Young Adult Money September 26, 2012 at 10:47 pm

James, I’m enjoying the commodities commentary!

2 James September 27, 2012 at 7:49 am

DC,

Go buy some gold!

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