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Most Popular Gold and Precious Metals ETFs in 2013
If you are looking to trade gold or other precious metals one option is to use ETFs, otherwise known as Exchange Traded Funds. These funds offer advantages for short term traders and investors who, for one reason or another, don’t want to hold physical precious metals or individual stocks in mining companies.

Reasons to Use ETFs

One advantage of these funds is that they are generally quite liquid, meaning that they can be sold at a moment’s notice if so desired. In addition, as with mutual funds, they typically offer broad diversification either by holding a basket of individual stocks or by being linked to a price index that reflects trading in a precious metal as whole –reducing the risk that can come with investing in just one or a small number of individual mining stocks.

iShares, a leader in Exchange Traded Funds (ETFs), has offices overlooking the future Transbay Terminal.
Image courtesy Chris Hunkeler/Flickr

Leveraged ETFs

Some precious metals ETFs may also offer leverage, using options to produce moves that may be 2 or even 3 times that of the index they are based on. Such ETFs provide greater risk/reward potential, at the cost of higher expenses which are associated with the cost of purchasing options and the related decay in value of those options over time. As a result, they are typically more suited for short term trading than for long term buy and hold strategies.

List of Most Popular Precious Metals ETFs

Following are some of the most popular gold and precious metals ETFs of 2013 taking into consideration factors such as trading volume, press coverage, and investor interest. ETFs covering a range of precious metal and holding types were selected in the name of diversity.

List contains the following: Ticker symbol; Name; (Average Daily Volume) over the preceding three months (taken from Yahoo finance as of 06/09/13); and a description of the fund.
1. GLD SPDR Gold Shares (13,919,100) SPDR Gold Shares holds gold and attempts to replicate the performance, net of expenses, of the gold bullion price. It is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets.
2. SLV iShares Silver Trust (12,751,600) iShares Silver Trust attempts to reflect the price of silver owned by the trust subtracting for fund expenses and liabilities. The fund’s goal is to provide an investment that is similar to an investment in silver. While the fund does not exactly replicate an investment in silver, it hopes to provide an alternative that allows investors a level of participation in silver through the securities market.
3. GDX Market Vectors Gold Miners ETF (22,671,100) Market Vectors Gold Miners ETF attempts to emulate, as closely as possible after subtracting for fees and expenses, the price and yield performance of the NYSE Arca Gold Miners index. The fund will normally invest at least 80% of its assets in the shares and American Depository Receipts (ADRs) of companies involved in the gold mining industry.
4. GDXJ Market Vectors Junior Gold Miners ETF (4,459,080) Market Vectors Junior Gold Miners ETF attempts to emulate, as closely as possible after subtracting for fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners index.
5. PHYS Sprott Physical Gold Trust ETV (1,734,570) Sprott Physical Gold Trust ETV is a closed-end mutual fund created to invest and hold substantially all of its assets in physical gold bullion. The fund seeks to provide a secure, convenient and exchange-traded alternative for investors interested in holding physical gold bullion without the inconvenience that is typical of a direct investment in physical gold bullion.
6. DUST Direxion Daily Gold Miners Bear 3X Shrs (788,017) Direxion Daily Gold Miners Bear 3X Shrs aims for daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the NYSE Arca Gold Miners Index.
7. SGOL ETFS Physical Swiss Gold Shares (124,867) ETFS Physical Swiss Gold Shares seeks to replicate, after expenses, the performance of the price of gold bullion. The trust holds physical gold bullion. The Shares are designed for investors who want a cost-effective and convenient way to invest in gold with minimal credit risk.
8. PALL ETFS Physical Palladium Shares (101,286) ETFS Physical Palladium Shares aims to reflect the performance of the price of physical palladium, less the expenses of operations. The fund is designed for investors who want a cost-effective and convenient way to invest in palladium with minimal credit risk.
9. PPLT ETFS Physical Platinum Shares (67,472) ETFS Physical Platinum Shares seeks to reflect, after expenses, the performance of the price of physical platinum. The fund is designed for investors who want a cost-effective and convenient way to invest in platinum with minimal credit risk.
June 10, 2013
Mutiny at the Fed: Is Disagreement Among Central Bankers Good for Gold?

Recently talk about the Federal Reserve’s Quantitative Easing (QE) program has turned to “tapering,” or scaling back on the amount of bonds the Fed purchases each month in an effort to stoke the economy. Along with this talk have come indications from the minutes of recent Fed meetings of disagreement among at least some members of the Central Bank’s voting committee as to how long to continue the QE program, in view of its potential for causing asset bubbles, among other concerns.

Whether such worries represent a full-fledged revolt against the QE program or just expressions of concern is hard to determine. However, for gold investors the issue is an important one, as actions taken by the Federal Reserve, as well as other Central Banks, can have a dramatic impact on the price of gold.

The Fed and the Gold Bull Market

After many years in the doldrums, the price of gold began its historic ascent (which would eventually propel the yellow metal to all-time highs in nominal terms) in the 2001-2002 period as the Fed moved to ease monetary conditions in the aftermath of the stock market crash of 2000 and the terrorist attacks on 9/11. After a dramatic decline in 2008, gold rose along with other equity assets in 2009 as the Fed once again turned to accommodative monetary policy in the wake of market turbulence.

Gold’s Recent Price Action

As economic numbers improved following the financial crisis of 2008, investors placed bets on a robust recovery, as well as the expectation that with growth strong, the Fed would be likely to pare back its financial stimulus at some point. Gold’s price has suffered over the past year or so as a result, with investors focused on stocks and bonds instead of gold. However, the price of gold has recovered somewhat in recent weeks as economic indicators have weakened, which could be seen as ammunition for the Fed to continue to pursue accommodative policies.

Image courtesy Rlinger/Flickr

Fed Policy Going Forward

What the recent display of differences of opinion at the Fed would seem to demonstrate is uncertainty regarding future policy among the central bankers. With economic growth not as robust as they likely hoped, the Fed must determine its future course amidst a cloud of uncertainty. Will economic growth pick up again after the recent slow patch? Will the economy slide further into a downturn? These questions can only be answered with time, and the confusion the current situation has engendered is reflected in disagreement over future policy.

The Impact on Gold

While the Fed may well follow-through with its intention to taper its purchases of bonds at some point, the uncertainty its members have expressed about these policies shows that this is no sure thing. While it is too early to say how such actions would impact gold, the fact that there are differing opinions at the Fed shows that the current economic situation is not as robust as might be hoped. This uncertainty, in my opinion, is positive for gold given its ability to act as a safe haven and store of value in troubled financial times. That this is not a solitary opinion is demonstrated by the recent upsurge in the purchase of physical gold, which has kept gold dealers busy finding supply to meet the strong demand.

June 5, 2013
States Back Gold as Legal Tender

While recent gold price volatility has some questioning the durability of the bull market in gold which began way back in 2001, the move by a variety of American states to pass legislation enshrining gold and silver as legal tender shows that at least some officials in these states recognize the value precious metals offer. With the Federal Reserve’s Quantitative Easing (QE) program continuing unabated, the resulting tsunami of printed money poses risks to the value of the dollar. Precious metals such as gold have long been a hedge against inflation resulting from this type of currency debasement, which may explain the recent moves in some states to promote the use of gold and silver as legal tender.

The Case for Gold as Currency

Gold has hundreds of years of history as a currency in the form of gold coins, often in conjunction with silver in a bimetallic system. It was only in the 20^th century, when the crushing expense of financing the First World War and the subsequent great depression caused sovereign nations to depart from a gold standard and move towards unbacked fiat currencies. Such currencies are not convertible into gold, silver, or any other store of value, but derive their worth from the full faith and credit of the nation issuing them.

The advent of fiat currencies in recent times has brought with it a danger that stems from the very nature of an unbacked monetary system, namely, price inflation caused by currency debasement. In the case of gold, the supply of the metal at any one time is constrained by the difficulty and expense involved in digging it out of the ground. As a result, while growth in supply will vary depending on the price of the metal and new discoveries, over the years the rate of growth has been relatively modest.

When it comes to fiat currency, on the other hand, there is no natural limit on the potential increase in its supply. Either via a printing press or electronic creation, a nation’s central bank can dramatically increase the monetary base at little or no cost. Thus, the value of such currencies relies to a great deal upon the restraint of the politicians and central banks that control them. History has shown that in times of crisis, the temptation to increase the money supply as a method of dealing with the crisis has, in several cases, proven too much, and periods of high inflation have ensued as a result.

Image courtesy graur codrin/FreeDigitalPhotos.net

Practical Considerations

While a case can be made for gold as a currency when it comes to the yellow metal’s ability to act as a store of value, in practice re-instituting gold as a currency is another matter. While legislation to make gold and silver coins legal tender is under consideration in states such as Kansas and South Carolina, and Utah has already passed a bill authorizing bullion as currency, it is not clear exactly how such acts would be implemented. Utah is still mulling over the process by which bullion coins could be used to purchase goods 2 years after the passage of its bill.

Symbolic Measures

At this point, the move to make gold and its fellow precious metal silver legal tender is more a symbolic measure than anything else. Fluctuating values for gold and silver coins in dollar terms makes it difficult to use both fiat currency and precious metals for day-to-day purchases. This is not to say it can’t be done, just that for gold investors this movement might be seen for now more as a sign of discontent in regards to the rapid expansion currently being seen in the monetary supply and the risk of currency debasement than anything else. While it may not necessarily result in a rush by investors to their gold dealers to add to their holdings, the move among various states to make gold legal tender does at least demonstrate the enduring appeal of the yellow metal, even in a fiat currency world.

May 29, 2013
Should You Invest in Individual Gold Stocks, Funds, or ETFs?

If you are interested in investing in gold there are a variety of ways to go about it. You can invest in physical gold such as gold coins or bullion bars, or you can invest in securities which are based, to one degree or another, on the price of gold, such as gold stocks, mutual funds, and ETFs. Each of these investment classes has different characteristics, making it important for investors to do their homework before deciding what type of gold investments they want allocate funds to. For the purposes of this post, we will take a look at some of the considerations involved in investing in individual gold stocks, gold mutual funds and gold ETFs.

Gold Mutual Funds

While gold mutual funds tend to be more volatile than your average growth-oriented mutual fund, given their focus on a single sector, they will still generally be less volatile than an investment in individual gold stocks. The reason for this is diversification. Even if you have done extensive research on an individual gold mining company, if something unforeseen occurs it can lead to dramatic price moves in the company’s stock. As gold mutual funds will typically have a wide variety of individual gold stocks in their portfolios, a big move in the price of one stock generally won’t affect a fund as much as it would a less diversified portfolio.

As a result, investors just starting out, or those who want to participate in the gold sector while taking less risk than would be involved in buying a small number of individual stocks may want to take a close look at gold mutual funds as an investment vehicle.

Image courtesy Digitalart/FreeDigitalPhotos.net

ETFs

While gold mutual funds lessen the risk of investing in gold stocks to some degree by the practice of diversification, one risk that gold mutual funds aren’t able to reduce significantly is the risk of underperformance by gold stocks in relation to the price of gold. There may be times when the price of gold is performing well but gold stocks are failing to keep up with the gains in the spot price. In such cases, even a diversified portfolio of gold stocks may find itself trailing the moves seen in the precious metal. This can be a good thing when the price of gold is falling, of course, while being frustrating in a rising market.

Gold ETFs, which trade like stocks but operate much like mutual funds, can provide a means of dealing with this situation. Gold ETFs which hold physical bullion rather than individual gold stocks not only allow for intraday trading, but will also typically be more tightly correlated with movements in the price of gold. A potential negative of ETFs that hold physical gold for non-qualified money is that they are treated as collectibles for tax purposes.

Other gold ETFs mimic mutual funds in holding a basket of gold stocks rather than physical gold. While this doesn’t deal with the issue of performance drift, it does offer investors the advantage of being able to trade more quickly if necessary. This is because ETFs, like stocks, can be traded at any time the market is open, while mutual funds typically only trade after the market has closed for the day.

Individual Gold Stocks

If you are willing to accept higher risk for the possibility of higher returns, individual gold stocks may be worth looking at. Generally speaking, such stocks have the potential to provide leverage in comparison to the spot price of physical gold by providing outsized moves (either up or down) in relation to gold itself.

Such volatility is a double-edged sword, as what goes up rapidly during gold bull markets can come down just as fast during bear markets. That being said, if you believe that gold’s primary trend is a bullish one, and you are willing to accept the extra risk, individual gold stocks may be worth looking at as way to improve your returns going forward.

Summing it up

There are plenty of ways to invest in gold besides calling a gold dealer if you are so inclined. The type of instrument you choose, whether mutual fund, ETF, or individual gold stock, will depend on your investment objectives and risk tolerance. Some investors find that a combination of gold investment classes works best, while others may feel more secure investing only in the most diversified instruments, given the substantial volatility the sector can experience. In any case, if you’ve decided to take the plunge and invest in gold-oriented assets of some kind, doing your research and taking the time to closely examine the various options available to you is highly recommended

May 24, 2013
Are Gold’s Fundamentals Still Strong?

With the bull market in gold which began in 2001 seeming to run out of steam over the past few months or so, it’s a good time to take a look at the fundamental underpinnings of the bull run and see if they are still in place. Corrections and consolidation can occur even in the midst of strong bull markets, so the fact that the gold price has declined recently does not in itself mean that the bull market is over. Instead, we should examine the factors which have driven gold’s decade long rise in price, and see if they are still in existence if we want to form an impression about the whether the bull market is on its last legs or if it still has room to run.

Fundamental Factors Behind the Gold Price

Gold has long served as a store of value, especially in times of crisis when inflationary policies are in effect. It performs best during such times for a variety of reasons, including its long history as a monetary metal and the fact that its rarity makes it immune to the debasement that can afflict holders of unbacked fiat currencies.

While gold has held its value admirably over long periods of time, there are periods of time when the price of the metal may languish or decline. This may occur during periods of low inflation or strong economic growth when other assets, especially those that pay dividends or offer earnings growth, are seen as superior to the precious metal. Therefore, to determine if gold’s fundamentals remain strong, it is important to examine the economic landscape both in terms of its growth potential as well as looking at the outlook for inflation.

Economic Weakness Persists in Much of the World

If we scan the economic horizon we see that a number of countries, especially those in Europe, are facing prolonged periods of economic weakness. Even in the United States, where the economy has held up better, there have been signs that the economy is struggling recently. While this weakness continues, it might be seen as potentially beneficial to gold, given that the yellow metal is often seen as an alternative asset class to investments such as stocks and bonds. While those investments are generally dependent upon strong or at least stable economic conditions to prosper, gold’s performance is not necessarily tied directly to economic growth.

Gold’s value tends to fluctuate in-line with its appeal as an alternative currency, and this appeal often rises in times of economic weakness and crisis. One reason for this is that the reaction of central banks and governments to economic crisis may be to increase the money supply in an attempt to improve economic conditions. This currency debasement tends to increase the value of an asset such as gold that, due to its scarcity, can preserve purchasing power in the face of such dilution.

Image courtesy Danilo Rizzuti/FreeDigitalPhotos.net

The Outlook for Inflation

While reported inflation figures have been fairly low in both Europe and the US, inflation is a phenomenon that can strike fairly quickly depending on the circumstances. During past periods of rapid expansion of the money supply (which these days can be done either via the printing press or a computer equivalent) inflation has at times risen so rapidly that hyperinflation has ensued, as in Germany’s Weimar period or, more recently, in Zimbabwe.

While there are no signs that this will be the case currently, the QE, or quantitative easing, programs being promulgated by central banks such as the Bank of Japan and the Federal Reserve are large enough ($85 billion a month currently in the case of the Federal Reserve) that at some point an inflationary outcome could ensue.

Either way, the factors that have driven the powerful bull market in gold that began early in the millennium and have benefited those who purchased gold ahead of the pack don’t seem to have dissipated. With economic weakness apparent in many major western economies, and with central banks around the world promoting easy money policies, the conditions seem ripe for gold’s bull market to continue, despite short term losses.

May 22, 2013
Do You Know Any Other Investment That Has Been Around for 4.6 Billion Years?

With Gold’s historic bull run on pause recently as the yellow metal’s price has pulled back and consolidated over the past year, it’s as good a time as any to take a look at gold’s history and what makes it such an excellent store of value over the long haul. Unlike almost any other asset, gold’s history extends all the way back to the formation of the planet. That’s right, adding an ounce of gold to your portfolio can give you a piece of ancient history as well as helping preserve your purchasing power.

A glorious past

Gold was created with the other higher elements such as nickel, zinc, and silver in the explosion of a supernova, the death throes of a star of massive proportions. When the gas clouds formed by the explosion of one or more such stars formed into a new solar system, gold and the other elements were contained within, buried under the surface of the newly formed planet earth.

Given gold’s weight, most of its initial deposits on earth are believed to have sunk deep under its surface, leaving most of the gold found to date to come from meteorites that crashed into earth subsequent to its formation. With meteor impacts on earth few and far between over the past few thousand years or so, needless to say, gold’s supply on the planet is not rising.

Gold’s superb qualities were noted early on; it doesn’t rust, and is one of the least reactive chemical elements. Combine this with the metal’s beautiful luster and it’s no surprise that its use as a currency stretches all the way back to the dawn of recorded history and perhaps further.

Image courtesy JAXA/NASA/Suzaku/flickr

Gold as a store of value

Gold’s suitability as a form of currency was predicated on its durability and portability, among other things. Its scarcity was another factor that helped it reign supreme as a monetary instrument for thousands of years alongside the other precious metals.

Turning to the modern era, it’s that rarity which is most important when considering gold’s role as an investment alternative now that its centuries-long run as an official currency has been supplanted by fiat currency –currency that is backed by faith in the issuer rather than by its convertibility into gold or another precious metal. Given gold’s long history as a monetary metal, it acts now as what might be considered an antidote to fiat currency, attracting the most interest when faith in such currency dwindles.

This is most likely to happen when the central bank or government in charge of a currency decides to issue an excessive amount of that currency, diluting its value. As gold’s supply, limited by the difficulty in extracting the metal from the ground, rises only slowly, it tends to hold its value during such periods of currency debasement.

Image courtesy Digitalmoneyworld/flickr

Gold’s future

While fiat currencies have come and gone over the years, gold has remained a store of value for millennia. Its fiery creation formed it into a metal with qualities that can’t be matched, and value that persists. But while knowing of its 4.6 billion years of distinguished history may be comforting to its owners, doubtless many of them are even more interested in the yellow metal’s future. While gold’s short term price movements are impossible to predict with certainty, its ability to preserve wealth over the long when run when measured against inflation is well known.

Whether the current financial landscape, which is notable for the energetic money creation (so-called QE, or quantitative easing) of central banks around the globe, will evolve in an inflationary direction is hard to say, although if these QE programs persist such an outcome would not be unlikely. In any case, those who purchase gold can be confident in the knowledge that, unlike fiat currencies, the value of the yellow metal, given its rarity, is not subject to being inflated away at the whim of a central bank or government.

May 14, 2013
The Difference Between Paper and Physical Gold

Gold’s recent price volatility has driven a number of industry observers to remark on the dramatic differences that were being seen in the price to purchase physical gold such as coins and bars compared to the price seen in “paper” markets for gold such as the Comex futures market. Given that most long term investors in the yellow metal will likely purchase the physical variety of gold (whether in a Gold IRA or in some other account), rather than paper future contracts, examining the difference between these two categories of gold is a worthy issue to explore.

Is Paper Gold Real Gold?

While a futures contract is clearly not in itself real, or physical gold, it does have a link to gold in that it represents a certain amount of gold which the buyer of the contract can opt to take delivery of at the contract’s expiry. That being said, the vast majority of gold futures contracts are settled in cash prior to delivery. Therefore, this type of paper gold is distanced from the physical market to some degree in that it doesn’t involve the transfer of physical gold between the buyer and the seller for the most part.

This disconnect between paper gold and physical gold can lead to price disparities between the two, as was seen recently when the price of gold dropped steeply, causing physical gold buyers to come out in droves to buy the precious metal while it seemed cheap as referenced above. While the price of gold as measured on the futures markets declined, the actual cost to buy physical gold did not drop nearly as much, given the high premiums charged by many gold dealers.

Image courtesy Ben Woosley/flickr

Can the paper price of gold be arbitraged with the physical?

At this point you might ask if the physical price of gold when accounting for premiums over the spot price is much higher, won’t investors simply arbitrage the price difference to lock in profits? You would think this would be the case, and in fact there has been some evidence of a declining stock of gold in the warehouse of Comex gold dealers that would tend to support this.

Another sign of the rising stress between the paper and physical price of gold was the recent decision by Dutch bank ABN Amro to settle requests for gold delivery in currency rather than in gold itself. Taking delivery of gold does impose costs on the receiving party when it comes to storing the gold. As a result, a short term disparity between the price of spot gold on the futures markets and physical gold when accounting for premiums might not motivate a significant amount of arbitrage activity unless it was seen as being a long-term trend.

Image courtesy Tao Zhyn/flickr

Is there enough physical gold to back all the paper gold

The answer to this question is no. The amount of gold implied by the volume of futures contracts outstanding at any given time is greater than the supply of physical gold many times over. As long as those trading paper gold in the form of futures contracts or other instruments prefer to settle their gains or losses in cash this doesn’t necessarily pose a problem. However, if an increasing amount of the traders of paper gold decide to settle their contracts with the physical metal, it would present an interesting dilemma.

While the interplay between the paper and physical markets for gold will certainly be interesting to watch going forward, more important to gold’s future trajectory is likely to be the financial policies of the world’s governments and central banks. If they continue to flood the world with monetary reserves via quantitative easing (or QE) programs, both speculators and buyers of physical gold may increase their purchases of the yellow metal given its long history as a store of value during periods of currency debasement.

May 7, 2013
What’s Behind Rising Premiums on Physical Gold?

While the price of gold has recovered somewhat from its recent plunge below the $1400 an ounce level, one thing that has remained constant during the recent volatility has been the high premiums over the spot price charged to purchasers of physical gold. These premiums often reflect tightness of supply for a given metal, due either to increasing demand or a shortfall in supply. However, with the premiums reaching almost unprecedented levels in recent days, it’s worth looking at the factors driving this increase.

Physical gold and paper gold

While there is no such thing as paper gold in nature, of course, this is the term which is used to refer to future contracts and other trading instruments whose price is derived from actual gold. While this paper gold will ideally accurately reflect the price of physical gold, the transmission of price signals between the yellow metal and its paper equivalents can become distorted at times. This happens, for instance, when demand for gold is strong but the price of the metal on commodities markets such as the Comex is decreasing. In such cases, gold dealers are likely to react by increasing premiums to reflect the disconnect between rising demand for physical gold and declining demand for paper gold.

What is behind the physical and paper gold price disconnect?

How can the price of gold be dropping while physical demand is rising? One reason for the disparity lies in the time horizons of the participants in the physical and paper gold markets. Those who buy physical gold often plan to hold it for the long term as way to help them protect their purchasing power. Holders of paper gold, on the other hand, often are not inclined to be long term buyers. The highly leveraged structure of gold futures trading has something to do with this, as even a small move against a trader dealing in gold futures can have a significant impact on that position.

As prices move dramatically in highly leveraged markets, those who are adversely affected by the moves may find themselves forced to close their positions to cut their losses. This can have the effect of exacerbating price moves either up or down. As a result, a wave of selling in the futures markets for gold can drive prices far below what buyers of the physical metal are willing to pay at any given time. Recognizing this, gold dealers will use premiums to help buffer them from being forced to sell their goods at prices they may feel don’t accurately reflect the true nature of the demand for gold.

Image courtesy Pakorn/FreeDigitalPhotos.net

Do physical gold premiums reflect positively on gold going forward?

High gold premiums can be one sign that conditions are developing which are favorable for gold. Low supply, if not met by increased gold production or recycling, can lead to higher prices over the long term. While it is impossible to predict with accuracy whether this will in fact happen, a look at current economic conditions should give holders of gold some comfort in their positions.

With economic indicators weak in countries across the globe, the extraordinary stimulus programs (generally known as QE, or quantitative easing) seem likely to be with us for a while. The increase in the monetary base these policies foster has inflationary implications, as more money chasing the same amount of goods and services generally results in rising prices. While price reports have not shown broad inflation as of yet, continued money printing, as QE policies are sometimes called, has in the past led to high inflation a number of times. Either way, rising premiums to purchase physical gold seem to be a sign that worldwide demand for the precious metal remains strong, despite the heightened price volatility seen in recent days.

May 1, 2013
Gold’s Recent Price Decline Sparks Strong Physical Buying

The last decade has been good for the price of gold, with significant gains over the period. Nothing goes up in a straight line, however, as gold’s recent price volatility demonstrates. However, while the exact reason gold has fallen recently is hard to pinpoint, the result of that price drop is less difficult to figure out, namely, a surge in buying by consumers around the world who can’t seem to wait to get their hands on gold at these prices. The buying of physical gold instruments such as gold coins has been so strong, in fact, that the US Mint has suspended sales of one-tenth ounce American Eagle gold coins due to inventory depletion caused by the buying onslaught.

Physical gold vs paper gold

While large volumes of gold futures contracts (paper gold) are traded on futures exchanges such as the Comex, many of the participants in such markets are likely to be speculators rather than long term holders of the precious metal. One reason for this is the large amount of leverage such exchanges allow, meaning that a sharp price move, up or down, can be extremely painful for those caught on the wrong side of the trade. Thus, gold’s recent plunge below the $1500 per ounce support level may have triggered stop loss sell orders that helped push the price even lower in a “snowballing” effect.

On the other hand, for holders of physical gold such as coins or bullion bars, rapid price movements aren’t as meaningful because there is likely to be little or no leverage involved in such holdings. Thus, for those who believe in gold as a long term store of value, the recent price decline might be seen as an opportunity to look for a gold merchant and add to their holdings, rather than as something to decry.

Image courtesy Stuart Miles/FreeDigitalPhotos.net

What does the recent decline mean for gold in the long run?

While it certainly is never pleasant to see an asset that you own fall sharply in price in a short period of time, if you’re investing in commodities such as gold you should be prepared to experience spurts of volatility from time to time. Unless you’re a daytrader, however, the more important question to ask about the yellow metal’s fall is whether such a decline invalidates the long term case for gold.

With central banks worldwide continuing to hew to quantitative easing (QE) programs that increase the monetary base by “printing money,” current conditions would seem to be supportive of gold over the long run. Given recent weak economic numbers in the US and overseas, it doesn’t appear that an end to these programs is imminent.

Image courtesy Danilo Rizzuti/FreeDigitalPhotos.net

Why QE programs tend to be good for gold

Gold has a long history as a store of value, especially in comparison to other monetary instruments, such as fiat currency, which lack the scarcity factor that makes gold so precious. Given gold’s rarity in nature, and the expense involved in mining it, the annual increase in the amount of gold in circulation tends to be fairly small. When it comes to fiat currency, on the other hand, which can be created by either running a printing press or touching a button on a computer, there is no such scarcity effect.

Fiat currency, such as the euro, or US dollar, or Japanese yen, depends upon the restraint of the governments and central banks which control the currency to hold its value. Unfortunately, history has shown that in difficult economic conditions, politicians and central bankers are prone to printing money in an attempt to jumpstart their economies. While the effects of such policies on the economy are debatable, an increase in the monetary base is generally the result no matter how the economy responds.

If the economy remains weak, stagflation, or rising prices combined with lackluster growth is the result. In the worst cases, when excessive money creation feeds on itself and gets out of control, hyperinflation occurs. In either case, if you keep some portion of your assets in gold you are in position to benefit, as the yellow metal’s tendency to rise during inflationary periods can help preserve your purchasing power in the face of rapidly rising prices caused by currency debasement.

April 24, 2013
Things You Should Know Before Investing in Gold

Gold has been in the news recently due to its volatility, which saw the price of the yellow metal fall dramatically before recovering somewhat. While wild price gyrations such as this certainly attract attention, short term price volatility is something that comes with the territory when it comes to gold or any other commodity. The more important question an investor should ask before investing in gold is “what are the factors which drive its performance in the long term?” Understanding these factors is crucial to determining whether investing in gold is right for you.

Gold’s history as a store of value

An ounce of gold, it has been said, bought a good man’s suit one hundred years ago, and still does so today. This is another way of saying that gold has a history of preserving its purchasing power, even as paper currencies such as the dollar lose value over time due to the ravages of inflation. A major reason gold has been able to hold its purchasing power over time is the difficulty involved in increasing the quantity of gold in circulation. To cite another saying, you can print money, but you can’t print gold. Instead you must dig it out of the ground at a not-insignificant cost, meaning that the supply of gold available to be used, whether for monetary transactions, jewelry, or for industrial purposes, is limited.

Image courtesy Digitalart/FreeDigitalPhotos.net

Fiat currency risks

Another factor that can be cited in gold’s favor is the lack of counterparty risk. That is to say that if you invest in gold, you don’t have to worry that the value of that gold will be impaired by the spending policies of a company or government in the same way you might do if you buy a corporate or government bond or hold paper currency.

Fiat currency, on the other hand, is backed only by the confidence that the marketplace has in the government or central bank behind that currency. In normal times that confidence may be high, but in times of crisis this is not always the case. The reason for this is that there is no hard limit on how much new fiat currency can be created at any one time as there is in the case of gold, where such supplies are limited by how much gold can be dug out of the ground during a certain period of time.

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Gold in times of crisis

Gold’s value in preserving your purchasing power can be especially evident in times of crisis. In such times, a government or central bank desperate to deal with the crisis, or to appease a key constituency, may be tempted to increase the supply of its currency in an effort to calm the situation. If this continues for too long, or if the amount of new money created is more than the market can bear, inflation is typically the result, and, in the worst case, hyperinflation.

It’s too soon to say whether this will be the case with the current currency creation programs, known as quantitative easing (QE), which have been enacted in an attempt to spur economic activity by central banks around the world. However, the risk of increasing inflation that such programs bring makes it worthwhile to take some time to understand the various factors behind gold’s performance if you are considering investing in the yellow metal.

April 18, 2013