Which US presidential candidate does gold prefer?
Gold loves chaos and should be hitting new highs, especially with inflation coming down and with it, two rate cuts likely before year’s end.
In such turbulent times, gold should be included in every investment portfolio.
During the last ten years we have experienced one of the worst recessions on record, a global financial crisis that is unprecedented, currency fluctuations all over the world, bank failures, government bail outs, and an escalation of geopolitical tensions. However, the one safe-bet during these turbulent times has been precious metals, in particular gold and silver. Not only have both precious metals preserved the wealth of prudent investors who have diversified some of their wealth in the precious metal, it has increased their net wealth several times over.
In the case of gold and in spite of its 450% rise over the past 10 years and even though gold has always been a consistent store of value and a trusted medium of exchange, portfolio managers have tended to ignore this asset class.
If you look at the global equity markets there are thousands of shares and thousands of funds to invest in. And, while it may be possible to make good short-term returns by investing in certain shares, this is the exception rather than the norm. With such a large number of listed companies, investing in shares requires considerable research. A successful investor will access a company’s earnings and potential earnings. Earnings are important to investors because they give an indication of the company’s expected dividends and its potential growth and capital appreciation. However, net earnings are only part of the equation. Earnings per share (EPS) are used to make earnings comparisons more useful between groups of shares. Then there is the P/E ratio, Dividend Yield, Debt/Equity ratio, Return on Equity (ROE). Even if all this figures are acceptable, the competence of management must be evaluated. Unless your key personnel are not able to make enough right decisions then the profitability of the company can be jeopardized. After an investor has completed his due diligence, there are still other macro-economic considerations and in current times many of these are almost impossible to predict accurately. And, as we have seen over the past decade most of these global events have had a negative effect on equities. But, investors are not restricted to equities. The other traditional investment medium is bonds and like equities, there are many to choose from.
Yields, spreads, credit default swaps, credit ratings and basis points are all common jargon when it comes to bonds. Typically bonds are IOUs issued by governments and companies and traded on the bond markets just in the same way shares are traded on a stock market. Portfolio managers like investing in bonds because they offer a regular return, supposedly with less risk than shares. Investors get a predictable flow of interest payments once or twice a year, and hopefully, they receive their original investment back in full when the bond matures.
Like shares, there are many different bonds available, but the most popular are government bonds and corporate bonds. But, even investing in bonds is not risk free. Governments have been known to default on their debt which means investors lose what they originally invested. And, have you ever tried to sue a government for doing this?
Investors can also invest in commodities (gold, silver, platinum, palladium, copper, aluminium, zinc, crude oil, heating oil, natural gas and gasoline, corn, wheat, soybeans, oats, and rice and food and fibre consist of cocoa, sugar, and cotton etc.) or financial instruments (interest rate instruments such as the Euro Bund, Bobl, JGB, T-Notes and T-Bills) or equity indicies (CAC, DAX, FTSE, Nikkei, Dow the S&P, the Nasdaq etc.) and of course currencies.
And, unlike shares commodity prices are not influenced on factors such as analyst’s forecasts, bad management decisions, cash-flows, PE ratios, dividend yields and the like.
If you look at all the different listed shares traded around the world as well as all the different bonds plus the numerous different commodities, financials and currencies, selecting the right instrument can become confusing. And, that is why we use professional money managers or portfolio managers to help guide us through this myriad of investment instruments.
Even though gold bullion has been amoungst one of the best performing asset classes of all these instruments it is largely ignored by most investment advisors. And sadly, only a small fraction of all the money available for investment purposes flows into gold.
Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence.
Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold’s value does not arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money.
In contrast to other commodities, gold does not perish, tarnish or corrode. Gold mined thousands of years ago is no different from gold mined today. Therefore, gold existing in the aboveground gold stock is interchangeable with newly mined gold.
While there are many reasons for owning gold some of the basic reasons for owning gold are – currency protection, inflation hedge, store of value and as a form of insurance. And, unlike all equities and bonds, gold is portable. You cannot take your shares/bonds and offer them to a broker in some other country. In fact nowadays, as most trading is done electronically, share certificates are no longer available.
The gold market is one of the most efficient in existence, with international trading centres providing continuous data and prices 24 hours a day. Unlike shares and bonds, you can buy and sell almost anywhere, any time at a price that is the same around the world. Gold bullion coins are particularly liquid as they are traded throughout the world on a daily basis as an integral part of this international business.
The factors driving the gold price remain very bullish and I’m convinced the price is headed much higher, regardless of all the corrections we’ll inevitably see. So, even though you may already be invested in equities and bonds, it is not too late to include gold in your portfolios.
TECHNICAL ANALYSIS
Gold prices seem to be trapped between $1400/oz and $1440 an ounce, but remain supported above $1420 (S1) an ounce. I suggest buying on any pull-backs.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.
