In uneasy times, investors are looking for a more comfortable form of investment. Gold, with its history of stability, is attracting investors who favor long term growth over short term risk.
Gold coins, jewelry and decorative arts have been a form of currency since prehistoric times. Although in modern times, we don’t barter earrings for cars, gold is still valued as an investment, particularly in today’s volatile economy. Proponents of gold tout it as a safe harbor and a hedge against the unpredictable fluctuations of the stock market.
History has, for the most part, proven gold to be a sound investment. Even in times of economic instability, gold has retained its value. When markets go down, the price of gold tends to go up. Nor is its value sensitive to the currency market: when the value of the U.S. dollar has fallen, the price of gold has held and even increased. Since gold is still held as a reserve at most central banks, it tends to retain its value over the long term. This is one reason its value is not dependent on economic policies or inflation.
Today, gold’s value comes from its industrial use as well as the demand for gold jewelry and decoration. Because of the metal’s non-reactive properties and resistance to bacteria, it is a component in many medical and dental products. More valuable, perhaps, is the demand for gold for commercial products including computers, semiconductors, cell phones, televisions and spacecrafts.
There are a number of ways of diversifying your portfolio into gold. You can purchase gold ingots, gold buillon, buillon coins, or other tangible forms of gold from brokerage houses, and hold it in your own vault or deposit facility. Or you can purchase gold certificates, which allots you ownership of gold that is physically in the possession of a trading house or broker, thus saving you the inconvenience of transporting and storing the commodity. Another option is to trade in gold futures either directly through the commodity market or by purchasing shares in a gold Exchange Traded Fund (ETF). Some investors even invest by buying stock in gold mines.
As with any commodity investment, you only profit if the market price of gold increases. Gold investments, even the ETFs, do not pay dividends. Even if the value of your gold portfolio increases, you will have to liquidate part or all of your investment to realize any income.
The security of gold as an investment could also be seen by some as a detriment. Gold prices have remained stable for more than 150 years. With this stability, gold has been considered a better safe harbor rather than a way to earn large profits through speculation.
According to the National Mining Association:
“The price of gold remained remarkably stable for long periods of time. For example, Sir Isaac Newton, as master of the U.K. Mint, set the gold price at L3.17s. 10d. per troy ounce in 1717, and it remained effectively the same for two hundred years until 1914. The official U.S. Government gold price has changed only four times from 1792 to the present. Starting at $19.75 per troy ounce, raised to $20.67 in 1834, and $35 in 1934. In 1972, the price was raised to $38 and then to $42.22 in 1973. A two-tiered pricing system was created in 1968, and the market price for gold has been free to fluctuate since then.”
However, recent trends in gold prices have attracted short term speculators. Since 2007 the price of gold has risen from $700 a troy ounce to its recent levels that have consistently exceeded $1400 per troy ounce.
Some experts say that the rise in gold has been due, in part, to market manipulation. Governments will lease the gold reserves to mining companies who have a shortfall in supply. The leased supplies are returned to governments when mining inventories recover. Since these exchanges are not reported, it creates an overstated supply or a bubble of sorts. Analysts suggest that soaring gold prices are a result of an adjustment to the gold leasing bubble, which may burst.