Candlestick Trading Blog
December 18, 2007
Investing in Gold
| Gold prices, just like other commodities or stock, are ultimately driven by supply and demand. If you are interested in investing in gold it is important for you to understand basic economics in order for you build a strong portfolio. Centuries of evidence prove a shortage of gold will inevitably lead to higher prices, thus causing the price of gold to increase as well as the production of gold to increase. Once the supply catches up with the demand, then the price of gold will begin to decrease. This sounds easy enough, however, investing in gold, is more complicated than it sounds, and it is important to understand in great detail to avoid making investing mistakes. There are many ways to participate in investing in gold including buying gold itself, buying gold stocks, investing in gold futures, or buying gold derivatives. Before you begin be sure to determine how much of your portfolio should be invested in gold. Portfolio diversification is a must so do your homework to determine what makes sense once you have a better understanding of the gold market. When investing in gold, it is important to understand the different strategies used to do it successfully. Some investors use technical analysis and some use fundamental analysis. Technical analysis tools such as chart patters, moving averages, and market trends are used to speculate on the future price of gold. The economic cycle mentioned above is also used when investing in gold using this type of analysis. Investors may also use fundamental analysis meaning they use macroeconomics including things such as inflation, interest rates, GDP growth rates, and energy prices. They also analyze the global gold supply versus the demand. The performance of gold bullion, when investing in gold, is often compared to stocks. They are in fundamentally different asset classes in that gold is a store of value where stocks are a return on value. Stocks and bonds also perform best in a stable political environment with strong property rights and little turmoil. Some analysts argue that while gold may preserve wealth against inflation, it does not present the long term growth potential that stocks do. Five Rules for Investing in Gold: 1) Excessive reliance on trading strategies can be dangerous and counterproductive. Do not try to outsmart the market in order to generate returns by hyperactive trading.Returns from a buy and hold strategy are more than enough to compensate forinherent volatility when gold investing. 2) Investing in gold should be based on macroeconomic considerations. Gold will do well and exposure will be warranted if one suspects rising inflation, bear market in stocks and bonds, or destabilizing deflation. 3) Bullion or coins are a more conservative approach to investing in gold than through equities. With this investing strategy there is no need to scrutinize the worthiness of the financial institution. 4) Investing in gold in still controversial and seen as an anti-establishment type of investment. It is imperative that the investor does not rely on the financial media’s commentary or on the brokerage firm’s misleading information either. 5) Be sure to understand internal dynamics of the gold market as well as the investment timing issues. Pay attention to the weekly position reports of commodity trading funds, and the physical demand for industrial and jewelry. For many years the central banks around the globe were willing to sell enough gold into the open market to more than cover the huge supply deficit between the mined supply and the world demand. This marginal supply was more than enough to offset the gold deficit each year since the mid 1990’s. However, since 2001 the gold price has been running higher and higher, indicating that the central banks are no longer selling sufficient amounts of gold to make up for the global demand. If you are interested in investing in gold, now is the time to do it. The investment timing is crucial in that the price of gold will inevitably have to be re priced to a higher level to eliminate the gold shortage. Supply and demand will inevitably need to meet and offset each other in order to do this. If you are still interested in investing in gold, you will be surprised at the high amount of bullish factors that will contribute to your decision. Find investment strategies that work for you and develop them until you are ready to begin investing in the gold market. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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