Should You Invest in Gold these Days?

Gold is known as the “safe haven investment” because it appreciates in value throughout economic uncertainty. In long term portfolios, gold hedges and provides for diversification benefits. It effectively hedges on the U.S. dollar and tends to rise in value when investors are edgy about US currency.

Other countries have taken note of gold’s value. For example, Chinese investors have shifted away from U.S. Treasury notes in recent years, and put their reserve holdings in gold and silver, otherwise known as hard currency. China is currently encouraging its citizens to do the same. The shift is important because it signifies a positive future for the value of gold.

But gold’s rise could mean the dollar’s fall as investors move to ensure their portfolio futures.

How the Gold Market Works

Gold is a commodity and is exchanged on a worldwide market. Investors don’t buy the actual gold – they purchase contracts, and have the option of buying and selling specific amounts. The gold market is entirely electronic, and operates from London, New York, Tokyo, Chicago, Canada, Australia, India, China and the Middle East.

Bulls and bears can hit the gold market just like other commodities. Irrational markets and bubbles also affect gold prices. A sharp drop in gold value took place in 2011. In the 1980s, gold prices were cut in half. The difference between gold and securities, is gold sells when securities are down in value. As securities rise, investors move away from gold to purchase equities, and if they fall, investors scramble to buy gold.

The Over the Counter Market exchanges determine the price of one troy ounce of gold. The market is not a physical one. Dealers quote prices for buying and selling, and trades are made via communication sources, such as email and electronic systems. The OTC market is non-transparent because participants are not required to share information in the trading spectrum. In addition, the OTC market is less regulated.

The Current State of Gold

Gold is experiencing its largest weekly gain since 2011. In the past week, gold prices have increased approximately five percent. This came after the release of the Fed board minutes and statements made by Chairman Ben Bernanke that the Fed isn’t going to change much of anything, except bond buying.

The Fed Confuses the Issue

What resulted from Bernanke’s speech and the minutes were mixed messages for traders and investors. The Fed minutes demonstrated many policymakers do not believe tapering asset buys is appropriate, but nearly half see paring the purchases would be smart later in 2013. It’s basically a conflict of interest and has caused confusion about the Fed monetary policy. Bernanke also hinted he has no intention of stopping the printing of money.

Bernanke’s remarks have changed drastically since mid-June as he stated the economy was improving and the Fed would start tapering at the end of 2013. Next year, bond buying would stop altogether, according to Bernanke. His first commentary prompted the dollar to rise, global equities to fall and the selling off of gold.
Then, Bernanke switched gears, and the dollar fell while the price of gold rallied. The Dow rose to a record high, and the S&P closed, topping its all-time high. Gold prices hit highs in Hong Kong and New York. August gold prices were $1,283.60 per ounce, up by $36.20.

Relying on Bernanke’s Comments is Ignorant of Trading Fundamentals

It is unfortunate traders are basing their decisions on Bernanke’s comments because supply/demand fundamentals are being ignored. The result is erratic trading among investors. However, gold buyers from the US and other countries are snatching up the precious metal to preserve wealth.

Gold in China

In May, China saw gold imports jump to their second highest ever. As a continent, Asia is experiencing the strongest push for physical gold it has seen in 30 years. Bargain hunters are after gold bars and jewelry at lower prices. The demand is outweighing supply in Hong Kong. Exchange Society President, Haywood Cheung, said he hasn’t seen a rush like this in over 20 years. Even older members of the society say gold hasn’t been in the spotlight like it is now in 50 years. A Hong Kong jeweler, who happens to be the world’s largest in market capitalization, said some stores have sold out of the gold bars. Lines at a Beijing gold store went on for almost a city block.

Night Trading in Shanghai

Gold and silver rose in daily transactions as night trading was introduced with extended hours to 2:30 a.m. Prices in Shanghai are slightly more than London’s, selling at $30 per ounce as opposed to normal prices, which are $5 to $7 an ounce.

While Chinese factory employees are working round the clock to keep up with demand, dealers in Hong Kong are quoting premiums at an average of $5 per ounce, and one dealer went as high as $8. Singapore was quoted at $3, and gold enjoyed a four-day high.

The prices, with the exception of Shanghai, are low in comparison to past gold prices. It truly appears that the investors and laypeople have been bitten by the Gold Bug!

Sound Advice on Gold

Based on what we’re seeing, the purchase of gold makes sense despite the price collapse. In principle, gold is like insurance against financial devastation, war and the lowering of wholesale currency. As gold prices have historically been viewed as a sign of economic insecurity, the recent low prices may signify faith in the stability of the global economy.

The overview is the gold market is set to bust. Its quick rise and peak drew salivating investors, who were convinced its prices would continue to rise. The medical profession, as one example, began selling securities and purchasing gold coins. India’s gold sales soared, and will continue upward due to India’s gold-buying for the holiday season. In essence, gold is the mainstay amidst the exhausting economic conditions investors are facing today.

About the author: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes informative essays for the globally renowned spread betting and CFD trading provider, InterTrader.com.