The gold price keeps hitting record highs but can it continue to go up and up? It’s one of the only ‘safe havens’ available in the world right now but is it too late to invest? Here’s the Your Money Magazine guide to navigating 2011 gold fever.
Q: Is gold overpriced?
A: Gold has reached its highest price ever recently and that means there’s a risk that if you buy now, the price could go down and you could lose money.
Central banks in emerging markets such as South Korea and Mexico have been ramping up their stockpiles of gold and this is one indication that gold prices will remain high. Many investors have lost faith in the US dollar as a safe haven during economic or market turmoil and that means gold looks set to remain a valuable quasi-currency. Many of the central banks making large investments in gold are from countries which have experienced currency crises of their own, and believe that gold is the safest asset around.
Q: How high can it go?
A: Deutsche Bank recently maintained its US$2,000 gold forecast for 2012.
“We believe the main beneficiary of super low interest rates in the United States, a weak US dollar, a view that central bank holdings in the US dollar are still excessive and ongoing questions over the stability of the financial system will be gold,” Michael Lewis, global head of commodities research at Deutsche Bank says. “In our view, events over the past week have raised the probability of a price spike in gold.”
JP Morgan Chase recently told clients the spot gold price could hit more than $2,300 this year. It said in a note that $2,500 per ounce is possible.
Q: Could it crash?
A: Skeptics say gold generates no income and has no utility (like copper), so the valuation is based on the mercy of other people’s opinions.
Others cite sheer volatility as a major negative factor, since the gold price is affected by fast-money day traders. The price can tumble just as quickly as it rises.
Yet even some conservative managers will recommend a small allocation in gold as part of a balanced portfolio.
Q: Is there an historical precedent for the gold price continuing to rise?
A: William Rhind, managing director of US based ETF Securities, which manages $4.2 billion in exchange-traded fund assets, says gold is not overvalued at these levels. He says the price hit $873 in 1980 and adjusted for inflation, today’s equivalent would be just over $2,391.
If you decide to take the plunge beware of highly structured funds and look at all risks carefully
Q: What are the various ways available to invest in gold?
• Physical. Jewelry, gold bars, coins. The value of gold bars tracks changes in the gold price on a one-for-one basis whereas other factors influence the price of gold assets like jewellery so the gains may not be as dramatic.
• Exchange-traded funds (ETF). They are easier to trade (on the ASX) and costs are usually lower but gains don’t track the gold price and prices can be very volatile.
• Mining. Look for listed mining companies with strong production, low costs and reserve growth. Prices can be influenced by what is happening on the broader share market.