Is now the right time to invest in Gold? An excellent question to ask in October 2011!
Gold as an investment consideration has received high volumes of publicity, and rightly so; it has a strong, historical track record in volatile times. Large gains in the last 10 years means gold has gone from $200/ounce to approximately $1,600/ounce.
With most investors taking the ‘buy low sell high’ philosophy, this leaves many who would invest with the simple problem of ‘have I missed the boat’? In other words, have all the gains been made, and with a swift end to economic uncertainty, am I going to make a heavy investment loss? I, for one, believe there is plenty still in this run, with economic uncertainty more than likely to continue for the foreseeable future.
What we need to look at is fundamental economic indicators and some pointers to make an informed investment decision. Below are my top 10 reasons why gold remains a bull market for investors:
* Central Bank Interest rates are likely to remain very low for several years.
Japan is always an interesting model, as one of the first countries in the last 20 years to head towards 0% interest rates. “The lost decade” of 1990-2000, where low inflation and high values led to cheap credit, created an asset bubble and the inevitable crash (sound familiar?). One of Japan’s answers was to lower interest rates to stimulate the economy but this did not do nearly enough.
Japan got stuck in recession, including the following 10 years, now known collectively as the “lost years”. The problem was that in usual recessions, interest rates tend to be high, like the 15% experienced in the UK in the early 1990s. The lowering of interest rates was always seen as the “go to” measure.
In the West, we have followed a similar model and now experience near zero interest rates. Any upward movement would have a catastrophic effect on the housing market, with so many purchased using highly leveraged, cheap credit. Therefore, it is hard to see how we will pull ourselves out of this in the next 10 to 20 years. As I will look at later, it means the economy is unlikely to improve over in the near future and will almost certainly stagnate. As a result of the required low Central Bank interest rates impacting on an already weakened currency and a lack of liquidity, gold will always rise in value as alternative havens are sought. It therefore offers an investment opportunity right now on this basis.
* Bank deposit interest rates will also remain low for several years
As a result of point 1, point 2 follows. Savers are in for a rough time, getting next to nothing from their chosen bank. In many ways, it is an excellent situation for banks, who do not have to pay savers much of a return, and many savers will accept this. Investors looking for a return on their capital can only look in a few directions, and one is to invest in gold, whose value will remain robust whilst interest rates are low.
* The stock market continues to tank.
In the UK, the London Stock Exchange has gone from a high of around 2,000 points to it current position of 848, so a loss of more than 50% of its value in the last 4 years. With the lack of liquidity since 2008, and the numerous liquidity issues affecting governments and continents, like the Eurozone, let alone companies, it is difficult to see much value in the stock market unless it is found with a seriously well-trained eye. It is also true that fears exist about the bond market. This is a more complex subject, to be dealt with another time. So a falling stock market correlates historically with rising gold prices, and the indicators suggest this will continue and provide an ongoing investment alternative.
* Inflation can only rise with QE.
Standard economics tells us that the larger the volume of money flowing around the system, the less an individual note is worth. So it is we come to QE! At some point, inflation has to rise, and in many cases it has already done so, even if our governments downplay it. You only need to look at a loaf of bread and how much that now costs compared to 12-24 months ago. However, interest rates are unlikely to go up to combat this due to the damaging nature this would have on the housing market and mortgage loan repayments. As a result, inflation is likely to be on the up over the medium term, affecting everyone’s cost of living. So what is the best hedge against inflation? Gold investing.
* The economy is getting worse, not better.
There are numerous articles out there covering the stats in depth, and in the UK we will have a number of interesting data sheets out this week on manufacturing, etc. The nuts and the bolts of it is that unemployment is rising, the cost of living is going up, wage levels, in many parts of the private sector are going down, and a large section of the population in the UK and US is tied down with crippling levels of debt. Coupled with economic indicators, there is little to suggest a recovery is anywhere near close. In my mind, 10 to 20 years is a minimum. As a result, investors will see Gold will rise against the failing economy.
* Government debt defaults will affect currency valuations
A weak currency means it has low value of course, and as currency falls, gold rises as an alternative form of barter. As we know, not only private individuals are in debt, so are local councils and whole governments, right up to the US. With the increasing threat that governments cannot pay their debts, currencies weaken, and investors will see gold rising.
* Record returns from some gold funds
From a more positive investment point of view, Business Today Online reported an Exchange Traded Fund for gold in India had reported record monthly rises for their investors of 15% in August 2011. This suggests that the price of Gold, and therefore their investment returns, are still on the increase!
* Increasing demand for gold from Chindia.
The same article also provides some evidence of the increase in demand from India and China, which is a long-term fundamental with their growing populations coupled with increased prosperity. Looking at the jewellery market, demand grew in India by 38% and in China by 25% year-on-year, which is a solid indicator for us investors that demand for gold at least is still likely to be on the up and help provide returns.
* Many new companies created who want your gold show demand is strong.
It is interesting how many companies have been created who wish to buy your gold. In volatile times, along with heavy debts, it may seem a good idea, if not a desperate need, to sell your family jewels for cash. However, in the long term, you may be losing out again. It may be wiser to embark on a debt repayment scheme and negotiate the debt down with providers than sell assets that are actually rising in value over the medium to long term.
* Assets perform in a volatile market
This point may be a summary of sorts, but in a time when currency may become worthless, or a change of currency happens globally as the solution, owning “things” like land, like gold and silver means you have a bartering tool when all else has failed. History is littered with inflationary disasters, and gold has always been one of the ‘must have’ investments. It is still time to become a hard asset investor.
So there we are, my current thoughts on the situation. The long-term economic indicators are still in place for gold to continue rising even if prospective investors have missed out on a significant chunk of the gains. I hope I have shown that this investment sector is an interesting one to look at.
To learn more, click below for a great introduction to investing in Gold.
To learn more, click below for a great introduction to investing in Gold.
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