In search of a golden opportunity

When the economy declines, the US dollar weakens or inflation rises, gold is always a good asset hedge. At present, the price of gold is increasing dramatically after stock market volatility.

 

Gold has tripled in value against the US dollar since 2001. According to the World Gold Council's report on Feb 18, physical gold demand increased sharply in the second half of last year, including other types of investment such as Exchange Traded Fund (ETF), bars and coins, and was up 64% compared to 2007.

Since 1968, the usual benchmark for the price of gold has been known as the London Gold Fixing, a twice-daily telephone meeting of representatives from five bullion-trading companies.

The spot price is derived from gold-trading markets around the world as they open and close throughout the day.

The table overleaf sets forth the gold price versus various assets and key statistics.

In March last year the gold price reached $1,002.80 per ounce, an all time high, well above the $850 peak in 1950. It then fell, going as low as $750.50 in November, and then resumed its upward trend, temporarily breaking the $1,000 barrier again in late February this year.

Local gold traders still expect that they will see gold prices rise above $1,000 again in the second half of the year.

However, market analysts say you should not put all your eggs in one basket, but instead diversify your investment portfolio.

The reason to invest in gold?

Gold is an investment Thais know well. It is a currency that has evolved over the last 5,000 years.

Historically, gold has been a proven method of preserving asset value when a national currency becomes volatile.

If your investments are valued in a depreciating currency, allocating a portion to gold is similar to a financial insurance policy. In the past year, the climb in the price of gold above $800 per ounce is due to many factors, one being that the US dollar is losing its value.

- The dollar is weak and getting weaker due to national economic policies which don't appear to have an end.

- Gold price appreciation makes up for lost interest, especially in a bull market.

- Many central banks intend to increase holding gold reserves instead of selling.

- Gold funds which have long-term investment in bullion are mostly setting new highs for worth.

- The trend of commodity prices to increase is relative to gold price increase.

- Worldwide gold production is not matching the demand, and the price will continue going up.

- Indian and Chinese gold consumption is increasing as their national wealth increases.

- The global economic crisis has devalued many international currencies. The US dollar is weakening in contrast with gold prices rising.

 

How to invest in gold?

You must ask yourself why you want to invest in gold. If you like to see it in your asset portfolio, or like to touch precious materials, then you should buy some actual or tangible supplies. Physical gold bullion will be the answer for you.

But you must think of some drawbacks which include the risk and expense of storing your gold treasure. You may also plan to buy gold only to keep it in a safe deposit box. In this condition, what kind of gold will suit for you? Consider the following:

- Gold coins are collectible coins whose value surpasses that of their actual metallic content.

- Bullion coins such as American Gold Eagle or others, whose value reflects their actual weight and content. This is appropriate for a small investment as it is convenient and easy to store.

- Bullion bars are made of pure metal. They are easier counterfeited than coins, and because of the size, they're easier to pack with filler. When purchasing bars, it is wise to choose a reputable source.

Other choices are:

- Gold Exchange-Traded Fund (ETF) is another interesting way to invest in gold. An ETF is a type of mutual fund that trades on a stock exchange like an ordinary stock. The two most popular gold ETFs that trade in the United States both hold gold bullion as their only asset. They are namely Street Track Gold Trust with the symbol ''GLD'' and iShare COMEX Gold Trust with symbol ''IAU''. Both ETFs offer a practical way to possess gold in an investment portfolio.

For a Thai investor, you can buy gold ETFs from asset management firms that will invest both gold ETFs through the Foreign Investment Funds, or FIF.

- Gold Mutual Funds

If you are hesitant to invest in physical gold, but still want some exposure, gold mutual fund provides an alternative. The fund will invest in gold mining companies. Conservative investors prefer to go with a more moderate play. They will invest in senior gold stocks which have operated for a long time with large capitalisation, or investment in junior gold stock which has greater risk of loss and has smaller capitalisation. This may be appropriate for investors who accept the possibility of gold-based losses in exchange for potential rather than double digit gains.

- Gold futures and options

This type of investment is for more sophisticated and experienced investors. For the Thai market, you can invest in gold futures only through Thailand Futures Exchange (TFEX). Options and futures investment is complex and more risky. It requires experience and understanding. If you feel smart, lucky and wealthy enough to play in futures investment, it is for you.

How much should I invest in gold?

Mrs Jotika Savananonda, a managing director at SCB Asset Management, suggests that gold is such an alternative investment, you should invest between 5% and 15% of your portfolio, while diversifying in other investments such as bonds and stocks, while retaining some cash.

Where can you buy?

Physical gold

For the local market, you have two choices. Pure, 99.99% gold, is favourable and can be bought from both international and local markets. The popular local play is of 96.5% purity, and that you can buy from gold shops nationwide.

 

Gold ETFs and Gold Mutual Funds

You can contact any asset management firm which offers gold funds. At present there are around nine funds, which you can access at www.aimc.or.th.

Any drawbacks?

- Gold's value is historically volatile. It is now on an upswing. It fell about 70% in the 20th century.

- When economic growth is steady, real estate markets are robust, oil prices are rising and the stock market booming, the value of gold may decrease. Demand for gold will decline as investors move to other markets.

- For long-term investment, the return of gold is less than stocks.

According to the Wall Street Journal, if you had invested US$1 in gold in 1969, it would have been worth about $20 by 2006, but $1 invested in the stock market (according to the S&P 500 index) would be worth more than twice that figure.

- Gold investment does not pay dividends like stocks when the company makes a profit.

- Gold value does not always track inflation.

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