The right time for investing in gold (or anything else) is when the price is low and not when it is high. We published an article nearly four years ago in which we noted that what goes up commonly comes back down. At the time gold was peaking at $1,888 an ounce. Today gold investments have gone back down with gold bullion currently selling for $1,195 an ounce. Gold has fallen 34% in just under three years. During the same time that gold investments have fallen by a third the S&P 500 has gone up from 1300 to 1800, a 38% rise. Interestingly as private investors are fleeing gold investments China appears to be buying huge amounts in an attempt to substantially increase its own gold reserves. Gold investments by China may be something to watch as the Asian nation attempts to internationalize the Yuan and turn it into a reserve currency similar to the US dollar, Euro, or Yen.
Various Types of Gold Investments
Despite the fact that gold bugs only want to buy gold bullion there are other sorts of gold investments. The problem with holding gold bullion is that you need to keep it safe in your bank lock box or a larger storage facility if you have a lot of it. Gold bullion does not pay interest. And gold bullion is a commodity that goes up and down based on market sentiment. Fundamental analysis of gold investments tells us that gold goes up in times of chaos and when currencies and economies are weak. Gold investments fall when economies strengthen, interest rates go up, and governments are secure. Gold mining stocks are great when gold is rising as these gold investments tend to rise faster than the price of bullion. Likewise, rare gold coins tend to outdistance gold in a rising market. Both of these types of gold investments fall precipitously when gold heads down. A reasonable means of investing in gold without having to store bullion is to buy shares of an exchange traded fund. When investing in exchange traded funds such as those that track gold, one can enter and exit the investment easily. However, these are not dividend stocks that send you a quarterly check or stocks that grow with the economy. Gold ETFs only track the price of bullion and as such fell as badly as gold bullion in the last three years.
When to Buy Gold
The Chinese may have gotten it right in buying gold as it falls. Their central bank is buying gold at a steady clip. The country is the largest gold producer in the world and exports very little of the shiny metal. Here are the countries with the largest known central bank gold reserves.
|
Rank
|
Country |
Gold (Tons) 4/2013 |
|
1 |
United States |
8,133.5 |
|
2 |
Germany |
3,391.3 |
|
3 |
IMF (International Monetary Fund) |
2,814.0 |
|
4 |
Italy |
2,451.8 |
|
5 |
France |
2,435.4 |
|
6 |
China |
1,054.1 |
|
7 |
Switzerland |
1,040.1 |
|
8 |
Russia |
976.9 |
|
9 |
Japan |
765.2 |
|
10 |
Netherlands |
612.5 |
These 2013 figures are based on the most recent disclosures by the various central banks concerned. Regarding China, the nation has not disclosed reserves for five years and is due to do so again next year. Some speculate that China may have doubled its gold reserves along the way. To the extent that they are keeping domestic gold off world markets and buying gold on the world markets they are helping support the price of gold. At such point as they may choose to quit buying gold the price could plummet. To the extent that China may choose to tie its currency to gold it could be disruptive to world trade. It is our opinion that China will not choose any route that dramatically increases the value of its currency as that would make its goods more expensive in world markets and threaten an economy already seeing threats to its export markets.