Well, I thought I’d just chime in with my 2 cents on this one along
with the caveat that I am not a financial advisor.
I realize that your question began with the premise of investing in
"actual gold" and assume that you mean physically holding ingot or
bullion. It is important to point out that if you wish to physically
take hold of your gold, that is one thing, but if you are interested
in investing in gold primarily for monetary gain, then your better
option is to get into an ETF (exchange traded fund) such as GLD
which tracks gold prices. It is the best way to get the most return
for your dollar when it comes to gold as you do not have to pay any
refining charges or deal with selling your gold under spot to others.
As a general rule, it will always be hard to buy gold at spot (as
there is always some level of minting fee whether it be $10 for
ingot, $15 for Maple Leafs, etc.) and it will always be hard to sell
your gold at spot as you will always have some sort of refining fee
or percentage taken from the lot. However, with an ETF you pay only
the commission for the transaction (whatever your broker may charge)
regardless the size of your holding. From an investment perspective,
it is definitely the better way to go.
As far as the price of gold is concerned (when to buy, when to
sell), you need to understand a number of the reasons for the
movement in gold price.
Primarily, gold is a hedge against inflation. It is typically linked
inversely to the US dollar. When the dollar rallies, gold usually
falls. When the dollar weakens, gold usually rises. For example,
around March 9 or 10, the Fed announced it was going to be buying
$300 billion in long-term treasuries…
ie. printing money and debasing the US dollar. The following 9 days,
you can see how debasing the dollar caused a massive rally in the
Euro ($1.26US to $1.37US… a truly astonishing move for the
currencies market) which paralleled gold’s move of $893/oz. to
$978/oz. over the same period.
Because the value of gold is so closely related to the US dollar,
one metric for measuring the “estimated” value of gold is to compare
its price to the Dow Jones Industrial Average (DJIA). This is another
way of looking at its relative cost in the same way investors look at
P/E ratios (price to earnings ratio… the ratio of the stock price to
the company’s earnings). For example, let’s say that Company X in a
given industry has a P/E ratio of 15… Now let us suppose that the
industry’s average P/E is 18. By comparison, Company X’s stock would
appear to be undervalued by that metric and may be thought of as a
"BUY" to some investors (although one should never use only one
metric to value a stock!). In the same manner, gold can be viewed
relative to the DJIA. In 2000, it took 44 ounces of gold to buy a
share of the Dow (which makes either gold appear under-priced, or
the market to be over-priced). Currently, it would take only around 8
ounces to buy a share… which in turn makes either gold appear
over-priced or the market under-priced…depending on your
This can also be done relative to the price of crude oil…(how many
ounces does it historically take to buy a barrel of oil). But,
ultimately, I believe all of the metrics used are just other ways of
looking at the cost of gold relative to the US dollar. Sorry to have
rambled on about this. I could talk for hours if unchecked.
Basically it boils down to this: If you believe that inflation is
around the corner, buy gold. If you believe that deflation is where
we are headed, then sell gold. Given the current administration’s
budget, the varying bailouts and actions by the Fed, inflation is the
most likely place we are headed for now (hence China’s
suggestion/insistence of a world currency decoupled from the US
as they are currently bearing $1+ trillion of our debt which they see
as being devalued as of late). Anyhow, that is just my thoughts on
the subject at the moment. I hope that helps you in your decision.
One final word of thought from Warren Buffet. He does not advocate
owning gold as it pays no dividend or interest… your money sits
until you sell it off at either a loss or a gain.
Quick side note on mining stocks (since they were mentioned). To the
best of my limited knowledge, mining stocks may not be a bad idea
right now. With credit markets tight, there is a good chance for a
lot of consolidation to occur among the smaller mining stocks. As
mining stocks will behave similarly to gold a lot of the time, you
may have better luck with them considering that a number of them pay
dividends and will also now have the chance to “double your bet” (so
to speak) with the possibility of a buyout.
Reminder: I am not an investment/financial advisor. Research things
carefully before you get into the markets and talk to your financial
advisor about what options may best suit you.
Best of luck!
Erich C. Shoemaker