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8 Reasons to Own Gold

Wednesday, May 6th, 2009 at 4:50 pm

Gold is respected throughout the world for its value and rich history, which has been interwoven into cultures for thousands of years. Coins containing gold appeared around 800 B.C., and the first pure gold coins were struck during the rein of King Croesus of Lydia about 300 years later. Throughout the centuries, people have continued to hold gold for various reasons. Below are eight reasons to own gold today.

1. A History of Holding its Value
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. (Read more in Understanding Supply-Side Economics.)

2. Weakness of the U.S. Dollar
Although the U.S. dollar is one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008. The decline in the U.S. dollar occurred for a number of reasons, including the country’s large budget and trade deficits and a large increase in the money supply.

3. Inflation
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Since World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979 and 1980 (as of 2008). During those five years, the average real return on the Dow Jones Industrial Average was -12.33%, compared to 130.4% for gold. (As Coping With Inflation Risk explains, inflation is less dramatic than a crash, but it can be more devastating to your portfolio.)

4. Deflation
Deflation, a period in which prices contract, business activity slows and the economy is burdened by excessive debt, has not been seen globally since the Great Depression of the 1930s. During that time, the relative purchasing power of gold soared while other prices dropped sharply. (Read more in What Caused The Great Depression?)

5. Geopolitical Uncertainty
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity”, because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some of their largest recent movements during periods of tension with Iran and Iraq in 2007 and 2008. Its price often rises the most when confidence in governments is low. (Read how to cut through the confusion and invest successfully in Investing During Uncertainty.)

6. Supply Constraints
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. (Read more about the different options for investing in gold, from bullion to ETFs, in Getting Into The Gold Market.)

At the same time, production of new gold from mines has been on the decline since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices. (For more insight, read Economics Basics.)

7. Increasing Demand
Increased wealth of emerging market economies has boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world, and gold has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold. In China, where gold bars are a traditional form of saving, the demand for gold has also shown rapid growth. (Read about another way that China and India are impacting world markets in What Determines Gas Prices?)

Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, the largest gold ETF, StreetTracks Gold Trust (PSE:GLD), became one of the largest ETFs in the U.S. and one of the world’s largest holders of gold bullion in 2008, only four years after its inception. (Read more about gold ETFs in The Gold Showdown: ETFs Versus Futures.)

8. Portfolio Diversification
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:

The 1970s was great for gold, but terrible for stocks.
The 1980s and 1990s were wonderful for stocks, but horrible for gold.
As of 2008, this decade has been a good one for gold, and an unfavorable one for stocks.

Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk. (Read Introduction To Diversification to find out how diversifying a portfolio can enhance returns and reduce risk.)

Conclusion
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, gold has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.

by Tony Daltorio, (Contact Author | Biography)

Tony Daltorio worked for more than 20 years in the investment business. Most of those years were spent with Charles Schwab & Co., both as a broker and a trading supervisor. As a supervisor, he oversaw, at times, dozens of employees. Daltorio was trading supervisor during the 1987 crash and was responsible for millions of dollars of customers’ orders.

Source: http://www.investopedia.com/articles/basics/08/reasons-to-own-gold.asp

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The dollars price of an ounce of gold

Thursday, April 23rd, 2009 at 5:01 pm

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by Thomas Chaize

Since the ounce of gold has passed the $ 300 I wrote 26 subjects on its price. I had 100% success, so I hope that if will be the 27th. I keep here only the technical analysis of the price of one ounce of gold; I will explain the fundamentals of gold in my 2009 report about world production of gold.

The record price for one ounce of gold to 1005 dollars.

The ounce of gold rose to $ 1005 in March 2008 to establish its record, and then a decline has occurred to 692 dollars in October 2008. The gold price has again risen to 989 dollars in February 2009, to a level close to its previous record.

At what level the price of the ounce is there correct?

Thanks to Fibonacci retracements (indicators), we isolated four possible downside:

38.2% retracement i.e drop to 876 dollars.
50% retracement i.e drop to 841 dollars.
62.8% retracement i.e a drop to 803 dollars.
100% retracement i.e a drop to 692 dollars.
You have noted that ounce of gold is already at its 38.2% retracement to 876 dollars one ounce.

The retracement of 50% is the 1st Summit of 1980 to 843 dollars one ounce and that of 100% in the second summit of 1980 to 697 dollars one ounce, it forms a sort of channel of purchase.

If you are looking for an entry point to the gold, you have it between 876 and 692 dollars the ounce. Ideally you can find it at the bottom of the horizontal channel of the 1980s, between 843 and 692 dollars.

The next record gold prices.

After the correction of an ounce gold price is complete, it will rise beyond its previous record to reach area to 1300 dollars per ounce simply by a pendulum effect.

The road map is as follows: we buy between 876 and 692 dollars in the area of the old peaks of 1980 during the current decline then to cover 1300 dollars. The summit of 1980 to 843 dollars, adjusted for very optimistic “official” inflation, gives us 2 158 dollars to be truly at the same level as 1980.

“Inflation is like toothpaste: once out of the tube, it is impossible to return them.“ Otto Pöhl

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Going for gold: How the world’s mints are coining it

Monday, April 6th, 2009 at 4:03 pm

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The world’s mints are coining it as unprecedented numbers of savers search for safer investments

By Sarah Marsh in Vienna and Jan Harvey in London

Sunday, 5 April 2009

LEONARD FOEGER/REUTERS

The Austrian Mint is producing more Philharmonic gold coins in a week than it normally does in a month

A few years ago his visits to the mint, founded more than 800 years ago, might have seemed eccentric. No longer. From the Russian Georgy Pobedonosets to the American Eagle, gold coin production is being cranked up in mints around the world to satisfy customers believing the assets may be immune to the global financial crisis.

Russia’s state-controlled Sberbank says it has never seen such strong demand for investment coins. In Australia, the Perth Mint had to suspend new orders for gold coins because it could not keep pace with overseas demand. And, in America, the US Mint says sales of its one-ounce American Eagle gold bullion coins rocketed by more than 400 per cent to 710,000 ounces in 2008. “The demand for gold and silver,” said US Mint spokeswoman Carla Coolman, “has been unprecedented.”

Austria’s Philharmonic, named after the Vienna Philharmonic Orchestra, was the world’s best-selling gold coin in the last quarter and sales soared 544 per cent in the first two months of 2009. “There is no sign of demand abating,” Austrian Mint’s marketing director Kerry Tattersall said. Sales this year are expected to exceed 2008′s record levels. “At present, production is struggling to keep up with demand.”

Hans Dieter Rauch, who sells both collectors’ and investors’ coins in his boutique on Graben, one of Vienna’s most exclusive shopping streets, said revenues rose 300 per cent last year. “It’s the man in the street, not particularly rich people but normal citizens like you and me,” said Mr Rauch, 65, monitoring the fluctuating price of gold on a screen in his back room.

Gold hit a record high of $1,030.80 (£700) an ounce in March 2008 and last month rose back above $1,000. Jewellery sales by cash-strapped Americans and Europeans have helped to slow the metal’s rise in recent weeks.

The Czech Republic’s Komercni Banka this month added gold coins and bars to its traditional portfolio of products. Even the Central Bank of Armenia is at it, issuing 10,000 gold coins with a Zodiac signs design. And, in New Zealand, Michael O’Kane, head bullion trader at the mint, said it was averaging a month’s transactions in a day.

Wealthy investors are more likely to invest in bars than coins as the premium for production costs is lower, said Wolfgang Wrzesniok-Rossbach, head of sales at the precious metals group Heraeus. “If you buy a kilo bar you have to pay the surcharge for producing the bar, which is pretty low, only once” he said. “If you buy 30 1oz coins, which would be about equal to a 1kilo bar, you have to pay 30 times that amount.”

Coins have the edge for small investors who want flexibility and appreciate their aesthetic allure. Demand is for more than physical products: in the past few years, gold has been sought after for speculative gains, with interest in gold-backed funds in particular soaring. But since the financial crisis accelerated last autumn, interest in coins and bars has increased, with investors seeking security rather than profit.

Other manufacturers are reducing output and jobs, but the Royal Canadian Mint quadrupled capacity to produce its bullion gold and silver Maple Leaf coins in late 2008, and the Austrian Mint is producing in one week what it usually churns out in a month. It has extended its shifts throughout the night and weekend and recruited more workers to cope with the surge in demand.

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Cash is Trash

Monday, March 30th, 2009 at 5:10 pm

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by Howard Katz

You have probably been taught that the responsible way to handle your economic affairs was to work hard, be thrifty and invest safely. This is what the old timers did, and it worked for them. When they reached 65, they were able to retire

However, the old timers lived in a country on the gold standard. They went to work at age 16, saved 15% of their income each year and put it in the local savings bank at 5% interest per year. Let us do a little 8th grade math.

Assume an average wage of 30 oz. of gold per year. Saving 15% of that means saving 4½ oz. per year. At the end of a 49-year working lifetime, you have saved 220½ oz. of gold.

Now listen closely because what happens next is so astonishing that it was called a miracle: the miracle of compound interest. When you lend money at interest, in the first year you get the agreed upon rate. If you lend $100 at 5%, you get $5.00. It is in the second year, that the miracle starts. In the second year, you don’t merely get another $5.00. In the second year, you are not lending $100; rather you are lending $105, and at 5% this produces an interest of $5.25.; so at the end of the 2nd year you have $110.25. This is interesting. Not only is your capital growing; it is growing at an increasing rate.

Now to calculate what 5% interest does to your capital over a 49-year working life span is a long, difficult problem in 8th grade math. But I was a bad boy one day and had to stay after school, and so I calculated what 5% interest does to capital over a 49-year period. The answer, to cut to the point, is that it multiplies it by 4.25. So, the man who saves 220½ oz. of gold will, after 49 years at interest at 5%, have 220.5 x 4.25 = 937 oz. of gold. That is, you saved 220½, but you have 937. This so impressed the people of the 19th century that they called it the miracle of compound interest.

So here you are at age 65 with 937 ounces of gold in the savings bank. You can stop working, continue to draw interest on your capital, and you will receive 5% x 937 oz. = just shy of 48 oz. of gold per year. In other words, you can stop working and receive 50% greater salary than you did when you worked.

This was a wonderful system. It no longer exists, but it is very important if you want to know what to do with your wealth today and how to survive in the modern economic climate. To read the full article, click here…