Recently I have been getting e-mails from clients asking if they should sell existing investments and / or use most of their spare cash to buy gold.
Why the gold rush? Repeated news reports on the rocketing price of gold and the continuing plunge of the US Dollar against other currencies (although interestingly not against the Rupiah which is quietly falling with it) have not failed to catch people’s attention. In March the price of gold hit $1,000 an ounce, an amazing price when you consider gold was little more than $300 an ounce just 5 years ago.
If you cannot picture an ounce of gold, a kilo is 35.2 times heavier so a kilo of gold at $1,000 an ounce would be worth $35,200. Or, put another way, a million dollars would buy just over 28 kilos of gold, a small enough amount to fit into a suitcase and probably avoid paying excess baggage. When you think what else you could buy for a million dollars it just does not make sense.
Why is gold so popular?
Firstly it is virtually indestructible. When melted down it can be turned into any shape or form. Since time immemorial it has been coveted by kings and emperors. The mythical King Midas loved gold so much that he wished everything he touched turned to gold. He got his wish but hadn’t reckoned on turning his loved ones into gold as well.
Due to its indestructibility gold has been used for centuries as a form of currency. We no longer have gold sovereigns in circulation but governments worldwide maintain stocks of gold as part of their reserves. The fall in the US Dollar has strengthened this need. Of course, gold pays no interest but who wants a currency that pays only 4% a year interest if its value against other currencies or commodities falls by up to 20% a year?
Gold also has industrial uses and is used in dentistry. And of course the ultimate symbol of wealth is gold jewelry. In countries such as India this is a very important factor and the growing affluence in India has led to increasing demand.
Finally, the amount of gold left in the ground that can be mined economically is disappearing fast. Production has been further aggravated in one of the main producing countries, South Africa, by a shortage of electricity and many mines have had to close down.
Where will the price of gold go from here?
That is the $65,000, or perhaps we should say 2 kilos of gold, question. Some analysts, as well as people in the mining industry, think the price of gold could go to $2,000 an ounce, particularly if the US Dollar continues to fall. On the other hand we should reflect back to the last time there was a gold rush. In the late seventies, gold rocketed to $800 an ounce. But in 1980 it fell all the way back to around $300 an ounce where it stayed for almost a quarter of a century!!
Imagine putting all your savings into gold now only to see the value fall by more than 60%. You could be faced with selling and showing a loss of two thirds of your wealth or sitting on your investment for 25 years waiting for the next boom!
That of course, is a worst case scenario and an unlikely, but nevertheless not impossible one. More likely we could see a correction as wise investors take profits, resulting in a modest fall followed later by a more rational rise. If there is a serious global recession demand could fall for items such as jewelry but the price could still rise if the US Dollar keeps falling. Since gold is priced in USD there is a very strong relationship.
So should you buy, hold or sell?
It really depends on where you are now. If you have been following my column and taking heed on my comments on gold, commodities and energy over the past three or four years you will no doubt have some of these assets in your investment portfolio. Which also means you may have made gains of 200% or more. In this case I would say SELL a large chunk of the profits so that your portfolio retains its original balance. In most cases it should be possible to withdraw more than you actually invested while still retaining more than you invested. In short, an investor’s dream!
If you only recently bought into gold, but long enough (say three months) to show a small but significant profit then there is no harm in taking some of the profit out if the amount is significant (say at least a couple of thousand dollars). Otherwise HOLD but don’t panic if the price dips. The chances are it will come back and should certainly more than hold its own against cash over the long term.
If you have never got into gold no doubt you are regretting you have left it so late! Is it too late? Provided you can take a long term (10 years+) perspective it should still be a good investment. It might even make some more sharp gains in the short term, but don’t count on it. By all means BUY, but only to the extent that it forms a minor (say a 5% part) of your overall portfolio. There are many more assets you should be investing in such as equities, bonds, real estate, commercial property funds, hedge funds and of course other commodities such as agriculture.
And finally, how do you invest in gold?
You can of course buy gold jewelry directly. You can then actually enjoy the product although with the security issues in Bali and elsewhere it might not be a good idea to spread word around that you are loaded with gold! It is a very easy commodity to dispose of and therefore a prime target of criminals. It might also be very hard to take profits if the gold you invested in takes the form of a gold necklace you gave to your wife.
A far safer and more practical way to invest in gold is via a gold bullion or gold mining fund. They are relatively easy to buy and sell and you don’t have to worry about robbers!
Colin Bloodworth, Financial Partners
World Trade Centre 8th Floor, Jakarta and
Jl. Sunset, Kuta, Bali.
colin.bloodworth@financial-partners.biz
