As much as we love money at Your Money Magazine, it just doesn’t have the same caché as solid gold. If gold brings a special glint to your eye as well, then now is the time to invest in it.
By all indications, Australia is heading into a period of inflation.
The RBA’s Statement on Monetary Policy, which was released in early May, indicates it expects underlying inflation to be towards the top of its 2-3% per annum target by the end of this year and to exceed 3% by 2013.
“It’s clear that the risks now in inflation are on the upside, that’s why the RBA has a tightening bias. But at this stage I’m not getting any sense that prices are in runaway mode,” says Michael McCarthy, chief market strategist at CMC Markets.
While there’s no need to invest in a wheelbarrow to get your money to the supermarket, now may be a good time to look at what kind of investments are a good hedge against inflation.
First – a quick look at inflation. Clearly a little inflation is good – otherwise the RBA would not want to keep inflation between its magic target band of 2-3%. But when inflation grows at a higher rate it devalues money, can stifle growth, hurt productivity and hurt savers. It also erodes the buying power of your money home and abroad.
People most affected by inflation are retirees, people on a fixed income and people with little assets or savings.
Not only do prices of goods go up during inflation, so do home loan interest rates, rents, health costs and utility prices.
So what can you do? There are a number of things you can do when you’re staring down the barrel of inflation. Possibilities include:
1.) Bring forward spending on big ticket items such as cars and white goods, to avoid higher prices later
2.) Invest in assets such as real estate
3.) Save 15% of your gross income, or
4.) Put some money in gold
The problem with increasing your spending is you’ll have even less money when need it most. So buyers will have to balance the necessity of purchasing goods now, versus having some kind of safety net later.
Investing in real estate can be a good hedge against inflation. On the one hand, the market in Australia is relatively soft and lenders are offering some competitive rates to entice buyers, but on the other hand whether we’re in the midst of deflation or on the cusp of a bubble bursting remains to be seen.
Saving a portion of your income is always a good idea. If you’re looking at savings accounts, shop around to ensure you are receiving a competitive interest rate on at-call or term deposits.
And lastly, there’s gold – the “safe haven” asset.
“Gold is a pretty unique commodity in that it is virtually indestructible,” says Alex Vynokur, managing director of BetaShares. “All gold that was mined historically is still around. What it means is over time gold has developed as a store of value. And as anything which has a store of value tends to rise over time with the cost of living, which is reflected by inflation.”
So while the value of your dollar may drop during periods of inflation, gold will not. And even in a more bullish market environment, gold can still perform well, which makes it an attractive addition to a diversified portfolio.
While you may be convinced to buy gold, the next decision needs to be how to get your hands on some.
You have a few options:
1.) Buy gold coins or bullion directly
2.) Buy a gold account
3.) Buy a gold certificate
4.) Buy shares in gold mining companies
5.) Buy gold securities
Buying gold directly can be expensive – investors have to pay special brokerage on gold and will also have to pay insurance costs and storage costs – all of which can eat into your returns. You can purchase directly from a coin shop or over the Internet. In both cases you need to be sure you’re dealing with a reputable source.
A simple way to hold gold is to buy a gold account. These accounts allow purchases to exchange paper for hold and they will hold the gold for you in a vault. You must ensure the vaults are insured by a reputable third party. Storage and insurance costs are covered through small fees.
Gold-backed securities are another way to own gold without physically having to hold it. The certificates are redeemable anytime.
Buying shares in gold mining companies is another way to access gold as an investment. Note that this involves company-specific risk, as well as broader sharemarket risk.
You can also buy gold securities for trade on the stock market. This can be very complicated and not as safe as owning gold outright, but you do avoid storage fees.
There is also an exchange-traded fund (ETF) on physical gold which is similar to a gold certificate in that it’s backed by a deposit. BetaShares recently launched an Aussie dollar hedged gold ETF product, which takes the risk out of currency fluctuations of the US dollar.
Gold futures are based on the potential of finding and delivery of gold – are high risk and require quite a bit of research, but they can yield a high return.
The bottom line is: if you are looking at buying gold, it’s important to take a diversified approach.
How much you want to purchase will be up the individual investor, but experts indicate putting 5-10% of your portfolio into gold should be adequate.
*This article is intended to be used for information purposes only and should not be seen as financial advice.
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