Since before the invention of the written word, human beings have traded the precious metal gold in the form of coins and jewelry. It has been prized through the ages for its shiny warm color and malleability which make it attractive in jewelry and artistic decoration. For centuries gold coins served as currency and until recent history paper currency was still linked to the gold standard. Gold is also valuable due to its many industrial uses in electronics and medicine. Because of gold’s nature as a hard asset, it can act as a hedge against inflation: when inflation is high and currency loses value, gold remains immune to inflation and gains value. Also, with vast quantities of gold already stored above ground in comparison with the annual quantity of newly mined gold entering the market, the value of gold is driven almost entirely by demand rather than supply. Gold is priced in US dollars, and has an inverse relationship with the dollar: when the value of the dollar rises, the value of gold dips and vice versa. Gold is a popular form of investment through three main avenues: 1.) the purchase of actual physical gold, 2.) the purchase of gold shares through an Exchange Traded Fund, and 3.) gold options.
When you invest in gold by purchasing gold in the form of bullion or minted coins, you physically possess your purchase. This has both advantages and disadvantages. By possessing gold, you have an asset which you can easily liquidate anywhere in the world. Also possessing gold is a solid investment as a hedge against currency inflation or instability. With global economies still fighting the effects of the prolonged recession, many experts are predicting that 2013 will see gold prices reaching the $2,000 per troy ounce mark. However, after purchasing physical gold you are faced with the difficulty of storing the gold yourself. For most investors it is simply not practical to securely store a large quantity of gold. There are companies which will store your purchase of gold securely, however that negates the advantage of having a quickly and easily liquidated asset on hand.
That is why large private investments in gold are more commonly in the form of gold shares. These gold shares are commonly in Exchange Traded Funds (ETF). These are funds traded on exchanges such as NASDAQ or AMEX which track the price of gold and are backed by gold bullion held at major banking institutions. ETF do not generate income and thus have no dividends, however they are one of the most accessible ways to heavily invest in gold as a hedge against currency inflation.
Gold options are standard option contracts in which the underlying asset is a gold futures contract, that is an exchange traded contract between a buyer and a seller for a predetermined quantity of gold at a predetermined set price on a future delivery date. By purchasing a gold option you are essentially trying to predict whether the price of gold will be higher or lower than the current price on that future delivery date and then purchasing an option in line with that prediction. Gold put options are purchased when predicting that the price of gold will fall, and gold call options are purchased when predicting that the price of gold will rise. Compared to the outright purchase of the underlying gold futures, gold options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that have the potential to expire worthless.
Many market analysts are predicting that gold will climb in the short term as monetary policy in the United States and internationally remains uncertain, with prices expected to reach the $2,000 per troy ounce market in 2013. However there is less of a consensus concerning the long term predictions for the value of gold. Some feel that the US economy will stabilize more quickly than that of Europe, which will cause the dollar to strengthen, driving down the price of gold. Others feel that a more even economic recovery will occur, flattening the price of gold, or even driving it down as currency markets regain traction and the gold bubble bursts. An investment in gold, regardless which of the above avenues pursued, is a risk which can only be assessed in light of one’s own personal investment goals, time frame and position. Ask your investment advisor if gold is the right fit for you.
*Disclaimer: This article does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. This article is not directed at or intended for publication or distribution to any person in any jurisdiction where doing so would result in contravention of any applicable laws or regulations. It is the responsibility of the individual user to consider his legal and regulatory position in the relevant jurisdiction, the risks associated with trading such products and to ensure that the use of the article and the subsequent making of any investment does not contravene any such restrictions or applicable laws and regulations of any jurisdiction. Please seek the advice of professionals, as appropriate, regarding the evaluation of any specific investment, security, index, report, opinion, advice or other content.*