Current Issues Affecting Your Money
Investing in Gold
You may have seen in the news recently that the price of gold has reached historic lows. In December, the price dropped lower than it had been in years, and some have speculated that 2013 will close with the biggest annual percentage loss in over three decades. This low price makes gold an attractive option for investors. However, buying gold should be considered as carefully as any other investment opportunity.
Here are a few things you may want to know:
First, the price of gold generally benefits from times of uncertainty. Historically speaking, gold has been a hedge against economic downturns and inflation. So when investors are worried about the economy or the dollar they often turn to gold. This is why the price of gold (in the U.S.) tends to go up after bad news and down after good news about the economy.
Second, international consumers have been driving demand. Much of the demand for gold is generated by jewelry sales, and the biggest purchasers of gold jewelry are consumers in Asia. In these countries, China and India especially, gold jewelry is sought after as an investment.
Third, there are many ways to invest in gold. Of course the first way many people think of is to purchase gold items, and that is one way to invest. Gold can be bought in the form of jewelry, bars, or coins. While variations in purity, weight, rarity, and demand generally drive the value of these items, the “spot price” of gold is often used as a baseline. When individuals make these sorts of purchases, they often choose to store them in a safe place.
However, one does not have to retain their purchased gold. “Vaulted gold” options are available for consumers who would like to own gold without keeping it in their possession. These services are similar to safe deposit boxes. An individual purchases the gold, but it is securely stored for them.
There are also “gold accounts” available, more specifically allocated and unallocated gold accounts. In allocated accounts an individual's gold is on reserve specifically for them. In an unallocated account the gold is pooled. In this way, the individual's claim on the gold varies depending on the rules of the account.
Gold investment products are also traded on exchanges like stocks are traded on the NYSE or NASDAQ. There are different types of gold exchange-traded products, but a common type is a gold exchange-traded fund or gold ETF. Importantly, buying a gold ETF is not the same as buying gold itself. An ETF is backed by contracts, so you can only ever trade an ETF for its cash value, not physical gold. However, the prices of gold ETFs fluctuate with the price of gold.
There are even less direct options to gold investing like purchasing the stock of companies that mine for gold or investing in mutual funds that invest in those stocks. Clearly there is a lot to be learned about gold investing before jumping in.
So is gold a “good” investment? There is no simple answer to this question. No one can predict the future price of gold, and every investment carries risk. Whether this particular risk is worth taking is up to you and your personal investment advisor.
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