The case for and against 3000$ Gold (Part 1 of 2) – GLD

By: ispeculatornew
Date posted: 09.22.2010 (5:00 am) | Write a Comment  (17 Comments)

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One of the best returning assets in the past year as well as in the past 3 or 5 years has been gold. Yes, that old metal that has been around for centuries and was for some time the default currency used in the world. Its role has changed but Gold continues to be hyped. And while you might have missed a lot of gains if you did not buy gold already, there are many bright minds who think that Gold is headed much much higher in the next few years. We decided to take a deeper look into how and why that could happen and how to profit from it of course.

A decade ago, trading or owning gold was something that was done by one type of institution on a large scale; central banks. But nowadays, Gold is owned by central banks, pension funds, hedge funds, institutional and even retail investors. It is becoming a more “trendy” investment thanks to those who pump it as the best investment, or as the only way to do well when everything collapses. More on that in a bit. There are many ways of owning gold of course and that has also contributed to gold’s recent emergence. Let’s take a quick look at the ways to own gold or gold exposure:

Physical gold: Surprisingly, owning physicaly gold has been gaining popularity in recent years. Generally these investors want to own the yellow metal in case things go wrong. While owning gold used to be expensive, the costs have come down quite a bit as many companies have gotten into the business. These companies try to buy gold (in form of jewely or others), melt the gold back into coins or bars.It does turn out to be a bit more expensive but there is upsize as I will discuss a bit later on. Other companies have been buying gold in large quantities and reselling Companies like GoldLine and Scotia (Canada) have been making markets on selling physical gold.

Funds/ETF’s: Those investing in gold for investment purposes have generally been doing so through low cost ETF’s. A few years ago, buying gold required trading futures which makes it both complex and expensive. In contrast, owning gold through an ETF like GLD (by far the biggest) gives investors exposure to the yellow metal and to its price movements. There are many types of ETF’s, some invest in the physical gold, others do it through futures and some even buy the actual miners like Barrick Gold. They all provide different exposures of course but can all be interesting depending on your reasons for investing. Here are some of the main gold ETF’s that trade on US markets:

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Futures: It’s not the easiest to invest in futures and is probably not even worth considering for long term smaller investors but for short term speculation and large investors, it can be the right way to go about it.

So why is gold such a great investment right now?

Historical Hedge against inflation: One of the big reasons why investors have gone to gold is because historically it’s been a good hedge against inflation. The reason is quite simple. When money starts to lose value, hard assets such as gold keep their “relative value”. What I mean is that if the value of currency goes down (inflation does that), money invested in gold will generally more or less keep its value. Since inflation is usually triggered by central banks “printing money”, you can imagine how many are worried about this problem given the way the Treasury resolved the past crisis. Many believe it could take a decade to see inflation pop up but eventually it will.

Hedge against apocalypse: Increasingly, many believe that at any point in time, the whole system could collapse. The idea of course is that our system is based on belief. Belief that currency will be worth something, that banks will be able to pay back deposits, etc, etc. After the major crisis and smaller events such as May’s flash crash, there are more doubters about the system and some believe that there is at least a possibility that it could all collapse. Will it happen? Very unlikely. But if it did and we did return to a “simpler” way of life, Gold’s value would almost certainly pick up big time.

New Asset Class: If gold prices depend on supply and demand, there is a clear case for much higher prices. A decade or two ago, when only central banks were buying, the demand was mostly based off of their purchases and jewelry. But with many funds and other investors now wanting to get involved, the demand has clearly picked up big time and that can be self-fulffiling. If commodities (and more specifically oil and gold) are now an asset class of their own, there is little doubt that it puts huge pressure on demand for these products. That by itself will push prices up. And you know what happens when prices go up? More investors will feel the urge to get involved.

New World Currency?
: This is a tendency and a theory that has been going for on for some time now. As the US government continues to accumulate deficits, there are many US dollar holders who are losing their belief in the long term fundamentals of the US dollar. As that happensm they are looking for better ways to diversify and protect their assets. It’s not quite clear how to do it the most efficiently. Some have purchased Euros, Yen, and other currencies, often through baskets. And many have decided to buy gold. If this tendancy continues, gold could regain some of its lost purchasing power. Likely? It’s not clear honestly, but it’s not a far fetched scenario if the US government keeps up these deficits…

Where do you expect gold prices to move towards? Tomorrow, we will bring some counter-arguments…stay tuned!

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17 Comments

  1. Comment by The Financial Blogger — September 22, 2010 @ 7:44 am

    I guess it will reach the magic number of $3000 but it will eventually go down. Right now, we can find 10,000 logical reasons why gold will keep going up.

    It was the very same case in 2007 where we had tons of specialists claiming that we would be short of oil in no time and that the barrel will hit $200… still waiting!

    I think the price of gold is now supported by a high volume of speculators… next bubble to come!

  2. Comment by stephen — September 22, 2010 @ 9:51 am

    Long time ago I bought a few gold coins and they have been sitting in the bank earning zero interest but obviously I should have bought more. Now, my head says sell them but my heart says keep them haha. I wish I know what is the rational thing to do.

  3. […] The case for and against 3000$ Gold (Part 1 of 2) – GLD […]

  4. Comment by IS — September 24, 2010 @ 3:46 am

    @stephen – Where did you get those coins from? And I guess holding gold coins is a good hedge for apocalypse too so good to hold a few in any case.

  5. Pingback by DGB Roundup — September 24, 2010 @ 5:40 am

    […] The Case For & Against $3000 Gold @ […]

  6. Comment by Stephen — September 24, 2010 @ 10:25 am

    Hi IS, I got them from a local coin shop. I used to collect coins and many times when I was there looking for something interesting I couldn’t resist those big shiny coins. The shopkeeper was not a fan of them and used to advise me to get the coins with numismatic value rather than metal value. Many years later, I can tell you I’m happy I didn’t let him dissuade me from getting them.

  7. Comment by IS — September 25, 2010 @ 9:56 am

    @Stephen – haha wow that was indeed a very wise decision, congrats on the purchase!

  8. Comment by Stephen — September 27, 2010 @ 10:07 am

    Thank you IS. Now, if it does go up to $3,000 I will be elated. Weather it goes up or down I think I’ll keep them.

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