Tuesday, November 24, 2015

Is gold a good investment these days?

Despite the current low price of gold, long-term investors are piling into the commodity in the belief that the market has bottomed and the only way for the precious metal is up.
Indeed, investors bought $10 billion worth of gold coins and bars in the last quarter, says the World Gold Council (WGC), with individuals accounting for 26% of that demand - higher than any other institution or central bank.

The price of gold is currently trading at its lowest since February 2010 as traders prepare for a rise in interest rates from the US Federal Reserve.

That's because when interest rates rise, the cost of borrowing hits the price of gold since it makes other investments appear more attractive. A rise in interest rates will also increase the value of the US dollar and push down enthusiasm and prices for gold.

Factors that are driving the demand for gold

However, there are also a number of other factors that are driving the demand for gold.

The WGC says that Austrian and German investors are particularly investing in large amounts of gold because of continuing fears over the Greek economy. Investors in Eastern Europe are also putting their faith in the historical safety of gold as a valuable commodity.

 Figure 1* chart (supplied by AnyOption)
Demand for the commodity rose by 8% in the last quarter though the price per ounce is down around 12% on this time last year.

The director of market intelligence at WGC, Alastair Hewitt says that investors are thinking long-term when buying gold - generally between five and 10 years’ time for their investment to realise their potential profit.

In addition, there are more ways for people to buy gold, for example in the UK the Royal Mint has a range of gold products that make it easier for investors to buy the commodity.

This has helped demand for gold in Britain rise by 67%, or £60 million, however this is only a small market when looked at globally.

Demand for gold is muted

Around the world, demand for gold is muted - especially from India where a heavy monsoon season has dampened enthusiasm from farmers who tend to invest heavily in gold at this time of year.

That's not all, increasingly investors in gold are becoming wary and last quarter exchange traded funds saw an outflow of 66 tonnes of gold.

For most investors, gold is still a crucial way of diversifying their investment portfolio but they need to be aware that its value very often does not move in line with other investment classes such as property or equities.

For those looking to invest and cash in on potential gold price rises, a lot is dependent on whether the Fed decides to increase interest rates and many analysts are pointing to this occurring in early December which means that in the short term gold prices will be pushed further downwards.

As the price hovers around $1,080 per ounce it appears that many investors are sitting out of the market waiting for an interest rate decision and the price could, in all reality, reach as low as $1,000 per ounce before bouncing back. Compare this to the $1,900 peak in 2011.

Gold is a good investment these days

However, investors who are wondering whether gold is a good investment these days, need to bear in mind two potential issues that will affect prices.

Leaving aside the question of a US interest rates rise, there are some gold analysts who believe that the price of gold has actually bottomed and will not fall any further.

Secondly, gold is seen as a safe haven for investors and with the growing political turmoil around the world, particularly after the Paris attacks recently, the potential for gold to rise quickly in the short-term grows every day.