Monday, December 3, 2012

Gold is Still Not Able to Provide Useful Investment Opportunities to Personal Investors

Gold Price from 1975-2012
Investing in gold is one of the most difficult things do simply because it defies most of the laws of sound investing, in that it is one of the least predictable commodities that can be invested in. In the last decade gold prices have been increasing at a staggering rate with the price of gold increasing more than five times to what it once was. However before this more recent increase it had been consistently decreasing in value for 20 years. Researchers have come up with certain characteristics to help understand what effects the price of gold, however due its extremely fickle nature these still do not provide any usable baseline to be able to predict what will happen. Gold is thought of as one of the safer investment opportunities available along with treasury notes, which are bonds backed by the government, and due to its astronomical rise more investors are beginning to turn to it. However gold has many negative drawbacks and as a result it does not provide the personal investor much room in long term growth.

The Price of Gold Can Be Very Volatile

Although, it is very difficult to predict what gold will do there are still some signs to help understand its behavior. Gold as stated before is usually a more defensive or safer investment. Most investing experts believe that gold is a better bet than stocks in a recessing economy or in times of high inflation. Xiahui Gao a Visiting Assistant Professor of Finance at the University of Maryland explains what she believes controls gold prices.
However historically during golds price increase from about $300 an ounce to what its currently trading at around $1700 an ounce the inflation rate was low and for most of the decade decreasing. In addition more recently in the last two years gold has decreased almost $200/ounce but inflation has been increasing and we've been in a recession. At the simplest level, gold's price is purely based around supply and demand, so really price fluctuations should be based around investor psychology more than anything else. As much as investors would like to see gold continue to rise at the rate it has been, there is really no sure way to make any prediction on its price because its mostly based on how you think people will act. 

Gold is too Expensive for the Personal Investor

The biggest drawback of gold is also whats made it very attractive as an investment recently, that being it's price. Gold has skyrocketed to over $1700 dollars an ounce, and at the very least a gold contract will require an investor to by about 25 ounces of gold. Meaning in order to invest in gold you have to place an initial investment of over $42,000 at the very least, which also does not include the cost to store and protect your investment. For this very reason many people have turned to ETF's or exchange traded funds instead of physically buying gold. ETF's are essentially funds that you can invest in which are backed by the price of gold. So instead of physically buying on gold you are essentially betting that the price of gold will go up which will increase the trading price of the ETF. These ETF's have some positives in that they are usually priced by the gram so the average investor can afford them. In addition they are safer in nature because you are not encumbered by the burden of storing physical gold. ETF's still face the same challenges of unpredictable gold price fluctuations, and are taxed much higher than physical gold meaning the returns on investment are still not very positive in nature.

The Public Perception of Gold Still Remains Fairly Poor

Most people still do not view gold as a viable investment opportunity and as a result its public perception is only marginally better than what it once was a decade ago. Gold is still looked down upon as investment for those who believe the worst is yet to come. When asked if he would invest in gold, a University of Maryland freshman was fairly adamant about not wanting to put his money into gold.

Gold usually increases as the dollar gets weaker so in the long term our economy will not stay recessed for an extended period of time most likely. As a result if gold perception loses traction in the public, the demand for gold will drop and historically gold can drop drastically just as fast as it can increase. Gold at it's best can provide some insurance in shaky economic times, but what it won't provide is long term opportunity for a growing investment. The best gold investment you can make is purchasing jewelry for a loved one rather than  making it a cornerstone of your investment portfolio.


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