Buying Gold as an Investment
Throughout recorded history and in most societies across the world, gold has been regarded as the most valuable commodity one can possess. Before the introduction of paper money, gold and silver were almost the only acknowledged forms of currency, acceptable to anyone when buying or selling anything. Until modern times, most countries tied their currencies to gold, providing a solid foundation by guaranteeing that they could be exchanged at a fixed rate at any time.
The reasons for gold's popularity as a medium of exchange and a store of value lie in its unique properties. Unlike other commodities, it is rare, practically indestructible, beautiful and always in demand. Almost all of the gold that has ever been extracted from the earth is still in circulation. Although a limited amount of new gold is mined every year, the fact that it is such a rare and scarce metal means that it retains its value. The price of gold does rise and fall, but in recent times it has been on a consistently rising curve.
Factors Affecting the Price of Gold
The price of almost all commodities is generally determined by the laws of supply and demand. A rise in demand leads to a rise in prices and shortage of supply has the same effect. Conversely, a fall in demand or an increase in supply will lead to a drop in prices.
Gold is different. Because of its scarcity and the consequent fact that supply will always remain relatively consistent, its price is not subject to the usual rules of economics. With supply not really a factor, it is only demand that makes the price of gold fluctuate and what affects demand is usually a flight from risk. Gold is seen as a safe haven in difficult economic times. When stock markets or bond markets tumble, or property prices fall dramatically, people tend to invest in gold as a safeguard. It is seen as a good way of protecting their wealth against falling asset prices or inflation.
As we have seen recently, the value of gold increases rapidly during times of economic, financial or political uncertainty. It acts as a hedge against instability and is regarded as the safest investment to make when there is a crisis in the world economy.
Of course, prices can go down as well as up and gold is no exception to this rule. Once a particular economic or financial crisis is over, the price of gold may well drop. However, we have seen for centuries that no period of stability lasts forever. When investing in gold it is important to be aware of the economic cycle and its likely effect on the value of gold. It is also worth thinking long term when it comes to gold, rather than trying to profit from short-term jumps in price.
Ways to Invest in Gold
Gold is a malleable metal and so can be bought in various forms. You can, for example, buy gold coins from many different countries. South African krugerrands or British gold sovereigns are popular with investors. They are particularly popular with small investors looking to acquire gold in a way that is portable and easily bought and sold. Sovereigns have the advantage in the UK of being exempt from Capital Gains Tax, which can lead to a considerable saving in tax for investors. Rare gold coins can also be a good investment, as they often appreciate by more than just the value of the gold they are made from.
Another way to invest in gold is to buy bullion in the form of gold bars. These are available in many different sizes and weights. These can be bought from or sold to bullion dealers, whilst in some countries they can be bought directly from banks. It is important to be aware of the possibility of fraud when buying gold bars. Some bars are sold without the correct amount or purity of gold and should always be tested before purchase. One way of avoiding these kinds of problems is to buy gold that is stored in a vault that is approved by the London Bullion Market Association. This gold is tested and then never actually leaves the vault in which it is held, no matter how many times it is bought and sold.
Indirect Investment in Gold
It is possible to profit from gold without buying or selling the actual metal. You can, for example, invest in mining stocks. The share price of a gold-mining company will generally rise and fall with the price of gold, allowing you to take advantage without ever acquiring the gold itself.
If you wish to avoid the risk of investing in the shares of one mining company, you can buy into a managed fund that trades in a range of mining companies. This will help you to diversify risk and means that you are not tied to just one company that might run into unforeseen problems.
Conclusion
Gold has been a valuable and much in-demand commodity for thousands of years and will probably remain so for the foreseeable future. Although it is useful, in that it is used for making jewellery and forms a part of some industrial processes, its main attraction lies in its rarity and its universal acceptance as a store of value. Although it can be a very good investment, it is important to remember that the price of gold is very closely linked to economic uncertainty. Gold prices are presently at an all time high because investors are reacting to the financial crises around the world. A return to financial stability could well lead to a drop in the price of gold. As with all investments, it's important to get your timing right and not to put all of your golden eggs in one basket.
