Pearl Invest

Gold has always been a safe investment. You could hear from every corner that gold is the almost only safe investment you can make in times like this. And the gold price was stable for a long time. Even more, the gold price was on the rise for a long time. The price for physical gold broke its own records day after day. There was no end to see. Every day the price climbed a little bit higher on the ladder. But then suddenly in August 2011 the price of gold fall rapidly. Now many investors ask themselves: What were the reasons? And is gold still a safe investment?

The reason for the collapse was found in two occasions that has occurred only a few moments before. The rally, in which the gold price was in, began with the highest price gold ever has reached. The price for one fine ounce was 1911 Dollar. But then the price for a fine ounce rapidly decreased. It happened even faster, than the gold price increased in the weeks before. And that was something you could hardly imagine. In two days the price sank to about 1700 Dollar, more than 200 Dollars. A little bit later the price stabilized to 1740 Dollar. The reason for the stabilization was new exchange losses on the stock markets. But still, the price dropped dramatically compared to the maximum stage, it has reached just a few days earlier.

But the decrease had a few reasonable causes. First of all, the actions of the CME Group did its bit to the loss. The CME group, one of the biggest options exchange in the world, raised the margin 27 % all at once. But that was not the first time in this month. Already some time earlier the Group raised the margin. And since the margin is needed for the trade with gold, the enhancement affected the gold price, too. Before that incident the same happened in Asia. The commodities exchanges in Shanghai and Hongkong raised the margins as well. The motive behind all these actions was the attempt to stabilize the market of gold. Through increasing the margins the variations at the market would not be as high as before. Now the speculations out on the price of gold would be more expensive and far less attractive.

The second reason was the profit the investors could make. Many investors just took the gains due to the record prices from the market, as Nigel Longley, the manager of ETF Securities confirmed.

The United States alone looks set to increase their debt by nine trillion dollars over the next decade, warns Baumann – which doesn’t exactly help to instill confidence in the dollar, given their current record deficit. Gold will always benefit from any percieved weaknesses in the dollar, as it is considered to be the alternative global currency, so it will continue to rise in price compared to all currencies, as long as central banks continue their policies of low interest rates and increasing currency devaluation. International crises are another source of price increases.
The price of gold is in an upwards trend, however a price around 1.400 US dollars currently seems excessive, warns Baumann. The primary price driver is the current development of the US dollar, which in turn is largely influenced by the current plans the Federal Bank has commited to (Quantative Easing Part 2). If we heed to the old exchange mantra “Buy the rumour – sell the fact”, we should expect some dissappointment in the market if the Fed doesn’t buy assets from the market as expected. “We are witnessing the highest level of USD shorts we’ve ever seen, i.e. the majority of investors are positioned for a dollar decline that has already taken place internationally. Any strength that the dollar shows would lead to investors adjusting their positions, which would in turn further strengthen the dollar and negatively impact the price of gold”, says Baumann.

To put it bluntly: The price of gold could of course fall by the end of the year – but that isn’t necessarily going to happen. Another indicator that is causing some investors to hold back from additional gold purchases is the large amount of coverage gold investments are getting in the media. Everywhere you turn, you see gold traders sprouting up, offering to buy up consumer’s gold and offering “Gold ATMs”. Largely due to these trends, Volksbank Investments currently is only partially recommending additional new investments in gold fonds, gold ETFs and goldmine shares. If anything, it’s advisable to secure any existing investments, depending on the type of investment and your current investment potential.

High inflation and rising interest rate led to run on gold during the 1980s and sent the price of gold through the roof. The weakness of the dollar, creeping devaluation and the international banking crisis are behind the latest price increases.

A 300 percent price increase – that reminds us of the golden days of the dot-com era, or of certain leverage certificates. But who would have guessed that sort of price increase could be for the 79th element in the periodic table? The last 10 years have proved the gold investors to be right.

Gold – one all-time-high is followed by the next

The largest demand for gold is coming from exchange traded funds (ETF), fonds that can buy the actual metal, and from asian central banks. Even Italy alone for example has twice as many gold reserves as China. The chinese government is trying to make up this shortfall, as they have approximately 1.6 trillion US dollars in currency reserves and are suffering due to the devaluation of the dollar. Just this October, the indian central bank made the largest gold deal seen in 30 years. They bought 200 tonnes for 6.8 billon dollars and increased their gold reserves to six percent. But even amongst European households, gold makes up just over one percent of their savings, according to Ulrich Baumann, a gold expert with Volksbank Investmens.

Germany alone needs 10 years of the global gold production

In order to achieve the ten percent gold mix in its portfolio that some investments advisers recommend, Germany would need to buy up the entire global gold output for the next ten years. This gives you an idea of the constraints in this market. We’re unlikely going to see any large increases in gold production, the current yearly ouput of around 2.500 tonnes p.a. is likely to remain stable for the forseeable future.

So should you buy now, when gold is at 1.345 US dollars / 960 euros? After all, some analysts are saying that after adjusting for inflation, gold should be somewhere between 1.500 - 2.500 US dollars?

Before one starts to analyse possible target prices, it’s worth considering whether gold is going to be a venture, long-term investment or to protect your portfolio against the next possible crisis or hyperinflation, recommends Baumann. The investment vehicle you choose will depend largely on your investment goal. Speculative investments are best suited to short-term certificates or options, while long-term investors should look into gold fonds (ETF). If you’re feeling slightly more adventurous, you could invest in a goldmine-fond, or if you would prefer something less tied to a system, you could go for actual gold bars or coins to lock up in your safe.
Gold is currently tied to the US dollar, but is that correlation always correct? For investors from europe, that tie should mean that investing in gold is a zero-sum game, according to Baumann, as any profits they make would be lost due to the euro/dollar exchange rate. However, we are seeing record highs for gold in all currencies. This is largely because many investors expect governments in america, europe and japan to service their massive debts by printing large amouts of additional paper money.