Many people have asked me recently, “Why is the price of gold so high?” It seems that not only “gold bugs” have gold on their minds right now. With gold prices hitting the $1400 per ounce price recently, it’s difficult to NOT pay attention to this precious commodity. So what does drive the price of gold up? There are a number of factors that are playing into the steady rise of the value of an ounce of gold.
Fear of inflation
Many investors have been moving their assets into gold for some time now based on a fear of looming inflation. Historically, when inflation rises and your dollar buys you less and less, gold will become more valuable. Many people have been expecting infation to rear its ugly head for some time, but it hasn’t happened yet. For inflation to occur, you normally need to have housing prices on the rise, household income on the rise, and commodity prices on the rise. Currently we only have commodity prices rising. If these three factors hold true, it could be another year or two before we get some real inflation. Fear of inflation is one reason why the price of gold is so high.
Currency devaluation
If paper money is being devalued (it’s not worth as much as it used to be), then gold prices would be forced higher. This is happening all over the world right now. Many countries are devaluing their own currencies, not just the United States. Here in the U.S., our dollar has been declining in value for some time (although right now it is on the rise). Some experts believe that this has made it cheaper for people in other countries to invest their money into gold. People seem to have lost faith in dollar based assets, and that’s another reason why the price of gold is so high. Buying gold is similar to buying insurance on your house. You own your house because you believe that it’s a good investment in the long run. But you buy insurance on it just in case something bad happens to it. Owning gold does the same thing for your U.S. dollar based portfolio.
Overall instability
Most people are pretty uneasy right now about the instability of our political situation, our economy, and our interest rates. This nervousness is causing a lot of investors to place part of their assets into gold-based investments. If things ever do settle down and become more stable, you would expect investors to start to back away from gold. When that happens, people will no longer be asking, “Why is the price of gold so high?”
How can I invest in gold?
If you don’t already have a part of your portfolio in gold, it would probably be a good idea to look for an opportunity to get some. Some experts say that “the trend is your friend”. In other words, buying something that is on its way up will help you achieve better than average returns. But many studies show that buying near a high can be a recipe for disaster. Prices are very high right now, and I wouldn’t be surprised at all to see a pullback in the price of gold soon. When the price of gold dips down, that might be a good time to get some exposure.
GLD – This is an exchange traded fund, or ETF that gives you good exposure to the price of gold. You can buy and sell shares of this fund (symbol GLD) through any brokerage firm, and the only trading costs are the same commissions you would pay to buy any other stock.
SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market. SPDR Gold Shares are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange. The introduction of SPDR Gold Shares was intended to lower many of the barriers, such as access, custody, and transaction costs, that have prevented some investors from investing in gold.
SPDR Gold Shares represent fractional, undivided beneficial ownership interests in the Trust, the sole assets of which are gold bullion, and, from time to time, cash. SPDR Gold Shares are intended to lower a large number of the barriers preventing investors from using gold as an asset allocation and trading tool. These barriers have included the logistics of buying, storing and insuring gold. In addition, certain pension funds and mutual funds do not or cannot hold physical commodities, such as gold, or the derivatives.
GDX – Market Vectors Gold Miners ETF. This is another ETF that will give you exposure to the price of gold, without actually owning gold bullion. The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts of companies involved in the gold mining industry. The fund is nondiversified.
Hopefully this article has helped answer the question, “why is the price of gold so high?” Additionally, I’ve tried to give you a few ideas about how to invest in gold. The question I have not addressed is, “How much gold should I own?” This question can only be answered after evaluating an investors overall situation because every person is unique. Talk to your financial advisor or give us a call at 1-866-983-4222 for a complimentary review of your portfolio. Financial planning is about diversification, and looking at the big picture. Only after looking at a client’s total situation could a financial planner make a recommendation like that.
