Why gold and why gold stocks? This is a question among would-be investors and is often followed by the question, “Why now?”
Due to fiscal policies and monetary policies introduced by politicians around the world, currencies are no longer as stable as they used to. One must note though that even if paper money is faced with uncertainty, they are still valuable in the general world view. In fact, some currencies have remained strong through the years. But even if this is so, finance experts say, it is best to not assume that a certain hedge is full proof.
Printing Money In Excess And Its Relationship To Gold
Many governments are now facing deficits but still keep printing money in excess to add to the money that is already in circulation.
Wherever the money is going, printing money in excess hurts economies and individuals like you and me. Experts say that this can cause inflation and this is true. In theory, this mathematical change shouldn’t affect the economy at all. The market will only need to respond by increasing the prices of products to maintain balance between supply and demand.
However, different products and services don’t just adjust their prices overnight to go with the flow or to respond with this situation. This doesn’t happen in an instant and as a result, the ones who will adjust the prices first will make profit out of the situation while others will lose money. Consumers, on the other hand, will realize that the buying power of their money has decreased.
Money And The Gold Standard
Back in the day, currency was backed by gold. This standard was an effective way to regulate money supply in a country. It also made conversion from gold into non-gold money and vice versa quite easy. The gold standard served as a way for countries to determine their currency’s value as opposed to other currencies making it easier to convert dollars to pounds or yen to pesos.
During the First World War, the gold standard fell apart. Belligerents introduced inflationary finance to the world –something that many refer to now as fiat money. The Latin word “fiat” means “let there be” and the powers-that-be abided by this very definition. Fiat money does not have intrinsic value and it is only valuable because a central bank or a powerful person says it is. Many economists have been saying that this is a problematic system and they have been saying this for years.
In the United Kingdom, the gold supply constitutes a mere 4.05 percent of the GBP in circulation which means that the remaining 95.95 percent is not backed by gold. The United States currency tells a similar story. As of March 12, 2012, roughly 4.46 percent of US dollars are backed by gold. The rest, according to experts, are backed by goodwill.
To balance these sheets, the price of gold per ounce would have to rise. But this doesn’t mean that the powers-that-be are controlling this, the economy just does it on its own. The value of gold has kept rising through the years thanks to the instability of fiat money.
This instability is the main reason why buying gold stocks is a good idea. But why buy gold stocks now? It is never too late to buy gold, according to experts. But many note that economies are more volatile than ever and have projected that gold stocks are the stocks to buy instead of regular stocks. There is no better time to buy gold stocks than now. Hold your horses though because there are still details that would-be investors should take into consideration.
Individuals who have already decided to invest in gold will have to choose between two options, experts say. The first option is to invest in real gold bullion and the second option is to invest in gold stocks.
Some investors choose gold coins instead of buying stocks. Many usually shy away from such an investment though because of the shipping costs and the prevalence of gold coin scams have plagued the market for a long time. But let’s say you are able to buy gold bullions and you can get them from a reliable source. The next step is securing that gold and that is something many individuals cannot do.
Other investors, on the other hand, choose gold stocks instead of buying physical gold themselves. Gold stocks are safer and investors do not have to think about details on where they’d store the gold. And they don’t have to worry about theft either.
Also known as Gold Exchange Traded Fund (ETF), gold stocks are traded in the stock market. This is like having stocks in a certain company that produces or sells certain products. The only difference is, you won’t just be investing in one company.
When you invest in gold ETF, you are basically investing in a conglomerate of companies. It basically depends on you.
Will you be investing in gold stocks or will you be putting your money in gold-mining stocks? Let’s get the technical definitions out of the way. Gold stocks usually refer to Gold Price ETC while gold-mining stocks refer to Gold Stock ETF. The difference, according to experts, is that the former is linked to the price index of gold. If the price of gold goes up in a gold price ETF, your shares will go up too.
Investing on the latter, on the other hand, is linked to mining companies that mine gold. Making profit out of gold-mining stocks depends on how good the companies are and how fast they find gold.
It is a good idea to take a closer look at these two options to find out which suits you best. One thing is for sure, they are both lucrative but one is more lucrative than the other.
Gold Price ETF: How does it work?
When you invest in gold price ETF, you are effectively buying physical gold. A gold ETF buys physical gold and stores it in a safe place. The gold in storage is then divided into shares based on its market price. After it has been divided, these shares are made available to investors. Since gold price ETF is linked to the precious metal’s market price, investors will experience a rise in the value of their shares when the market price goes up.
If the dollar gains strength for example, the market price for gold will go down and so will the value of your shares. But don’t let this alarm you, this is just the way it works and it will not affect the intrinsic value of your gold.
How does gold stock ETF work?
Investing in this particular ETF means you are investing in a number of companies involved in the gold industry -the majority of which are in the business of mining gold. The shares you buy in such an investment are linked to these companies and how well they do in the market. While it is not as stable as investing in gold price ETF, investors who choose this ETF get higher returns. If you are a risk taker and want bigger rewards, this is the kind of investment for you.
Benefits of Gold Stocks
Buying gold stocks eliminates the risk of theft and having to spend money for a safe. It is also fairly easy to get gold stocks. Investors would only need an account with a broker to start trading.
If you buy real gold and store it yourself, selling your gold when you need to sell it will be more difficult. With gold stocks, you can buy and sell them in minutes.
But how much should you own? Experts say that it is best to buy what you can afford but if you are looking at your gold stocks as a hedge; it’s time to buy more. And is it advisable to own both gold stocks and gold-mining stocks? The answer is yes.
But my country’s currency is strong, should I still buy gold stocks?
As the dollar goes up, the market price for gold goes down. It doesn’t matter whether this particular currency or any other currency is strong today though because one must keep in mind that the dollar’s strength is not exactly sustainable. We are talking about paper money only partially backed by gold. There will be bad days and on those bad days, you will need your gold stocks more than anything.
Aside from gold price ETFs, experts say that it is a good idea to watch out for gold-mining stocks because these stocks have sold more in the past few years than the metal itself.
Gold Stocks As Insurance
Having gold in your portfolio makes perfect sense. It protects you from inflation and protects you from what could go wrong in the world economy.
In fact, many experts will even go as far as telling would-be investors that gold can keep them from losing their hard earned money.
If you would like to secure the value of your money, take a look at gold stocks now.