Investing in Gold
Is it a bubble? Are all fiat currencies doomed? Should you hold gold? Gold has been used as money and as a relative standard for currency throughout history. The gold standard was implemented throughout Europe in the late 1800s but was later done away with following World War I. Following World War II, the U.S. dollar was set to gold at a rate of $35 per ounce. This system lasted until 1971 when the U.S. suspended the direct convertibility of the dollar to gold and the dollar became a fiat currency. The Swiss Franc was the last currency to do away with the gold standard in 2000.
Gold has since become a flight to safety investment for many big funds and investors. Gold tends to rise in periods of market instability whether it be due to an economic, political or currency crisis. The gold market is also subject to speculation just like other markets. This occurs specifically through the use of futures contracts and derivatives.
Some people believe that gold is not a commodity anymore, but rather a currency due to the way the price has moved during the financial crisis in the late 2000s. Commodities tend to move with inflation, but in recent years there has been a distinct correlation between gold and the U.S. dollar. As the U.S. dollar index drops, gold rises and vice versa. And in periods of global economic uncertainty gold also rises as investors are unsure of what the market will do..
Since 2000, gold has gone from around $270 an ounce to over $1,900 an ounce. The most recent fluctuations in gold prices occurred in 2008 and now in 2011 due the current global debt crisis.
Gold jumped to over $1,000 an ounce in March of 2008, but then dropped back down to around $700 per ounce in November. In this latest economic crisis, gold has exploded. In late August, gold reached a record high of $1,908 per ounce. The price of gold has come back somewhat and has been trading in the range of $1,600 and $1,700 in late September.
Gold will continue to be a safe haven investment for big investors as long as they still believe that the current global debt crisis will continue.
Ways to Invest in Gold
This is what your average person thinks when investing in gold. Gold bullion is actual physical gold such as coins, bars and jewelry. When buying physical gold, buy as close to the spot price as possible. Some retailers will try and charge a high premium especially on rare coins. The best way for the average investor to invest in gold is to buy gold coins from the mint. The premium on these coins is about 4%.
Gold ETFs are exchange-traded funds and are very popular with investors who want gold but don’t want the hassle of storing it. These ETFs track the spot price and moves as the spot price moves. Here’s the three most popular gold ETFs.
SPDR Gold (GLD)- This ETF saw record trading as investors sought the safety of gold because of the ongoing Europe sovereign debt crisis. Big shots on Wall Street such as George Soros and John Paulson own this ETF.
iShares Comex Gold Trust (IAU) – iShares is another gold ETF that is backed by physical gold. This gold ETF is very accessible by traders and can be purchased through traditional brokerage accouts.
ETFS Gold Trust (SGOL) – This is the newest ETF and was launched in the latter half of 2009 and is backed by physical gold that is stored in Switzerland.
Gold Mining Stocks – Another way to invest in gold is to buy companies that mine it. This can be a little more risky because gold production has actually been on the decline the past decade. The problem many investors make is they buy gold companies that are penny stocks thinking they are getting a great deal. Most of these penny stock mining companies are exploration companies that don’t actually mine gold.