Invest in gold to beat inflation

The gold price on Tuesday broke the symbolic $1000 an ounce mark, and settled at $1007. Before early September, the highest 2009 price was on February 20 when gold price fixed at $989. It has traded in the range $870 to $993 since then with an average price over that period of $879. The present price rise shows an annual increase of more than 21% on the average price in September 2008, which was $829.93 an ounce.

The price of gold over $1,000 an ounce, for the first time in six months, follows a sustained rise in price over the past seven years. As against gold, the US dollar, which often moves in the opposite direction to gold, has been declining during that same period. Since April 2001 the gold price has more than tripled in value against the US dollar.

In the last century, major economic crises such as the Great Depression, World War II, the first oil crisis and second oil crisis lowered the Dow/Gold ratio substantially. During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and silver.

The stability in the gold price over long term insulates the price from eroding in any category or country, because gold is not closely linked to industrial output or consumer spending.

Investors who are less convinced about the strength of the economy recovery are moving into gold, which is usually sought as a haven from economic downturns.

More and more individual and institutional investors are now turning to gold as an independent asset class to ensure that their investments are properly diversified so that risk is minimized. In recent times, leading economists have been warning of rising inflation as a result of governmental measures pumping enormous funds into the economies as stimulus packages to rescue recession-hit economies. In inflation-hit economies, investment in gold is a sure means to retain the value of one’s real wealth.

Though gold’s real value can vary in the short term, its purchasing power has remained stable over centuries. The US dollar, the world’s main trading currency, has been fluctuating and weakening dollar. The dollar, having traded at highs earlier in the year, has weakened against the Euro, Sterling and many other major currencies in recent months. Against this, gold is a statistically proven hedge against fluctuations in the US dollar.

Though there is considerable improvement in equity market performance in recent months, there are still doubts being expressed about its sustainability. This concern over the stock performance is also encouraging investors to look to gold’s unique wealth preservation qualities to underpin their portfolio strategies.

World Gold Council, funded by the world’s leading gold mining companies, identified short term reasons for the recent gold price rise, such as recognition of gold as an asset class, continued fears over future inflation, the weakening dollar and, concerns about whether the recent rise in equity markets is sustainable.

Gold is measured and sold in troy ounces. One troy ounce equals 31.1035 grams or 480 grains, or one troy ounce is equal to 1.09711 avoirdupois ounce, which is widely used to measure weights in the US and UK.

Most investors feel that gold is celebrating because the day when inflation hits back is getting sooner than later. Investment in gold should not be more than 5 to 10 per cent of your assets. One can invest in gold by buying jewelry, gold coins, gold bars and exchange traded funds (ETFs). While investment in jewelry has aroused concerns about purity and jewelry making charges, coins come at a price and banks/financial institutions selling them charge a premium of 5% to 15% over the gold price. ETFs take care of all these issues and the charges are roughly 0.5%. ETFs also take care of the storage and they are the most preferred option for investment in gold.