Precious Metals
Investing in Gold
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Summary
The deteriorating financial conditions in the US have created an investment environment that has never been better for gold. The weak US dollar is forcing a massive global currency debasement that will see tangibles, particularly gold, rise significantly in price. As investors realize what is happening, they will seek alternatives to paper currency and financial assets. This will create an enormous investment demand for gold in both physical metal and select mining shares. This demand will further drive the price of gold upwards. Furthermore, interest rates in the US have dropped to rock bottom levels in an effort to combat the failing financial conditions. Historically, there has always been a strong relationship between negative interest rates and higher gold prices.Gold mined approximates 2500 tonnes per annum, yet traditional demand for gold has exceeded this by a considerable margin for a number of years. Even given the current weak global economic conditions, this supply-demand imbalance is expected to persist due to a decline in mine supply. To fill the gap between mine supply and demand, Central Bank gold has been mobilized through the leasing mechanism, which has facilitated producer hedging and financial speculation. Strong evidence suggests that 30-50% of all Central Bank gold is currently in the market. Central banks may be nearing an inflection point when they will be reluctant to provide more gold to the market.
With low interest rates continuing to fall, there is little incentive to hedge. Gold producers are reducing their hedge positions, thus removing gold from the market. Low interest rates partnered with rising gold prices not only discourage hedging, they also discourage financial speculation on the short side.
In recent years, gold has increased in popularity, particularly in prominent developing countries such as China, India, and Russia. In China, for example, demand for gold is expected to increase sharply and could reach 500 tonnes in the next few years. Many countries are also considering currency backed by gold.
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Conclusion
Gold has always been one of man's most prized possessions. Indeed, monarchs have waged war in the hopes of attaining it, kings and queens have sent countless expeditions around the globe in search for it, and thousands have joined the "Gold Rush", dreaming of wealth and countless riches. For centuries, gold has been regarded as money. Today, Central Banks around the world hold 25% of gold as a hard asset. Yet, although gold is a store of wealth, an asset, and an ultimate form of global currency, it continues to be under-valued, under-owned, and under-appreciated. It remains poorly understood by most investors.
Why is Gold such a Good Investment?
Today gold continues to hold its value and even soar with inflation. In times of uncertainty and geopolitical unrest, investors gravitate towards gold. Physical gold, unlike stocks, cannot go to zero. A properly diversified portfolio should contain 10-20% gold to preserve and increase one's wealth.
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