Crisis? What crisis? One could be forgiven for thinking that the plunge in gold price during the second quarter of 2013 could spell the end of one of the longest bull-run for the world’s gold markets. But apparently this was not the really the case, at least not for physical gold. According to the May 2013 press release from The World Gold Council (WGC), demand for bullions and jewellery, which makes up of 72% of global demand, has seen a surge following the mid-April price fall. This has left many retailers in China and India running out of stocks and refineries having to introduce waiting lists for buyers. On the other hand, gold-backed ETFs have seen outflows of 350 tonnes out of a total of 2700 tonnes held, from January to end of April.
The divergence in behaviours reflects the dichotomous nature of investment in gold, with consumers who prefer bullions and jewellery behaving very differently from investors of paper gold. This phenomenon indicates that even if there is an outflow of investments from the paper gold market, there will be always be a ready market among Indian and Chinese consumers. This is because the global appetite for gold is driven by Asian consumers, who remained confident in the long term prospects for gold. Indeed the profile of physical gold investors differs from paper gold investor. The former usually views gold as a safe long term investment for hedging against systemic bank failures and for decreasing portfolio performance volatility. The latter consists of investors who dabble in paper gold and are usually traders or speculators holding short term investment horizons with a view to trade gold for quick returns.
Beginners who are new to the gold investment scene should avoid paper gold products, which include options, futures contracts and ETF shares. This is because investing in these financial instruments requires a certain level of understanding of the gold industry and the possible pitfalls. Paper gold products are backed by physical gold and derive their value from the underlying asset. Investors need to know that buying these products does not entitle them to the underlying asset and one does not directly own the underlying asset. The advantage of paper gold is that one can leverage substantially and increase investment gains. However, the risk also increases if the price goes against the investor. Thus, paper gold is generally considered risky for beginners or non-professional traders as the potential for losses is greatly magnified.
Physical gold allows investor to diversify their portfolio risks and preserve wealth. The precious metal has traditionally been used as a form of currency for thousands of years and therefore its status as the universal currency should not be questioned. Gold bullions should not be considered as investment per se, but rather as a form of saving or insurance that serve to preserve one’s wealth. It should be stored for rainy day and not for trading purposes. After all, do you treat the home you live in as a form of investment? Do you trade your insurance policies? Likewise, gold should be viewed as a form of wealth to be passed down from generation to generation. Ideally, investors should build up their holding of physical gold before proceeding to invest in paper gold.
On 15th August 2013, gold and silver prices have broken out from their previous downwards trading channel. The price of gold has increased 3 % while the price of silver has increased 6 % in the last 24 hours. This at the same time as the US stock exchange, S&P 500, is trading at -1.5 %. The price correction for gold and silver may thus be over for good. Even though physical demand for both gold and silver has been increasing steadily globally during the last months, the price has been decreasing. With the paper markets setting the price for physical gold and silver, shortages have appeared. All these represent key market turning point and provides the cue for contrarian buying. Always remember, contrarian thinking is easy, but successful contrarian investing is difficult. Most amateur contrarians overlooked the fact that the crowd is right most of the time. It is only at market turning points where the crowd is wrong and contrarians are right.
In conclusion, gold should always feature in everyone investment portfolio but it is important that one hold the correct investment philosophy and do the proper research before purchasing gold. Not knowing the differences between physical gold and paper gold can be risky and may to potential investment losses for small players. As the saying goes, when it comes to gold, “if you don’t hold it, you don’t own it”. There are too many Ponzi scams based on paper gold schemes. So always go for physical gold.