GOLD RUSH
By Pauline Yong
history is the oldest and most stable currency. But, is it worth
investing in gold now, given that the market price for an ounce of
gold has risen over US$540 from US$275 five years ago? Before we
answer that question, let us go through the reasons behind the rapid
rise in gold prices.
Gold prices historically rise when people lose faith in paper
currencies. (In the 80’s, inflation drove gold prices to US$850 per
ounce.) This is especially true now when we are experiencing the cost
push inflation that caused by rising oil prices.
Moreover, since the outlook for US dollar isn’t bright and clear due to
their historically high current account deficits, people starts to take
shelter from gold.
By Pauline Yong
history is the oldest and most stable currency. But, is it worth
investing in gold now, given that the market price for an ounce of
gold has risen over US$540 from US$275 five years ago? Before we
answer that question, let us go through the reasons behind the rapid
rise in gold prices.
Gold prices historically rise when people lose faith in paper
currencies. (In the 80’s, inflation drove gold prices to US$850 per
ounce.) This is especially true now when we are experiencing the cost
push inflation that caused by rising oil prices.
Moreover, since the outlook for US dollar isn’t bright and clear due to
their historically high current account deficits, people starts to take
shelter from gold.
Gold Chart 1975 - 2006
Since 2001, the US Fed has been easing their monetary policy or increase
money supply. This has created excess liquidity. When there is too much
money around, the price of gold generally rises as people try to maintain
purchasing power against the effects of inflation.
In addition, there is a shortfall in supply of gold by the largest gold
producing country -South Africa. This is because the gold price was low
during the 1997 – 2002 period, hence, lack of exploration for gold since then.
Moreover, it takes time for the gold industry to respond to the rise in gold
prices. According to experts in this field, the average lead time for a large
discovery to go on-stream production is around five to seven years. Many
current gold miners are relying on the discoveries that were made many,
many years ago as the cost of exploration is high. As a result, they are not
replacing the reserves that are mining every year.
So, is it worthwhile to invest in gold? The answer is ‘Yes’. Investing in gold
is a form of diversification in your portfolio. Over the long term, a portfolio
allocation of about 10% to gold reduces overall volatility, improves returns
and provides a form of portfolio insurance. Unlike traditional insurance or
hedging strategies, gold is an asset rather than an expense. Its value can
never decline to zero.
Now, back to the question of whether it is the right time to invest in gold?
Personally, I think it depends on how the world tackles the macroeconomic
problems. If US dollar continues to get weaker, coupled with weaker stock
markets and greater inflation, there is a great chance that gold price will
move higher.
However, some analysts in the Wall Streets believe that the current US$540
per ounce is too high and they expect a correction in the next two years
before continuing their upward trend. Sources from The Wall Street
Transcript state that the average gold price in the next two years will be
around US$460 per ounce.
In Malaysia, for those who want to invest in gold, the best way is to buy
physical gold. For example, Maybank offers Kijang Emas Gold Coins, where
investors can invest directly in gold and at the same time to treat it as
collectible items. For those who have excess to the foreign share markets,
you may want to invest in gold mining companies in Australia and Canada
by purchasing directly from their share markets.
No matter what the gold price is for 2006, put some portion of your assets in
gold is definitely a great way to diversify your portfolio.
money supply. This has created excess liquidity. When there is too much
money around, the price of gold generally rises as people try to maintain
purchasing power against the effects of inflation.
In addition, there is a shortfall in supply of gold by the largest gold
producing country -South Africa. This is because the gold price was low
during the 1997 – 2002 period, hence, lack of exploration for gold since then.
Moreover, it takes time for the gold industry to respond to the rise in gold
prices. According to experts in this field, the average lead time for a large
discovery to go on-stream production is around five to seven years. Many
current gold miners are relying on the discoveries that were made many,
many years ago as the cost of exploration is high. As a result, they are not
replacing the reserves that are mining every year.
So, is it worthwhile to invest in gold? The answer is ‘Yes’. Investing in gold
is a form of diversification in your portfolio. Over the long term, a portfolio
allocation of about 10% to gold reduces overall volatility, improves returns
and provides a form of portfolio insurance. Unlike traditional insurance or
hedging strategies, gold is an asset rather than an expense. Its value can
never decline to zero.
Now, back to the question of whether it is the right time to invest in gold?
Personally, I think it depends on how the world tackles the macroeconomic
problems. If US dollar continues to get weaker, coupled with weaker stock
markets and greater inflation, there is a great chance that gold price will
move higher.
However, some analysts in the Wall Streets believe that the current US$540
per ounce is too high and they expect a correction in the next two years
before continuing their upward trend. Sources from The Wall Street
Transcript state that the average gold price in the next two years will be
around US$460 per ounce.
In Malaysia, for those who want to invest in gold, the best way is to buy
physical gold. For example, Maybank offers Kijang Emas Gold Coins, where
investors can invest directly in gold and at the same time to treat it as
collectible items. For those who have excess to the foreign share markets,
you may want to invest in gold mining companies in Australia and Canada
by purchasing directly from their share markets.
No matter what the gold price is for 2006, put some portion of your assets in
gold is definitely a great way to diversify your portfolio.
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