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Gold rush: pros and cons

Gold, still a good investment

Gold’s reputation as a safe haven investment has taken a battering recently, with the precious metal suffering in April its biggest one-day fall in 30 years. Yet despite the volatility, gold bullion dealers reported record interest as investors sought to acquire the yellow metal at cheaper prices. What then are the key considerations in buying gold and other precious metals?

1. Diversify the portfolio

“Gold should be a part of everybody’s portfolio to some degree because it diversifies the portfolio,” Ray Dalio, founder of the world’s biggest hedge fund, Bridgewater Associates, told CNBC. “It is the alternative money. We have a situation now where, when you have too much debt, too much debt leads to printing of money to make it easier to service. So all of those things mean that some portion [of an investment portfolio] should be in gold.” Gold and other precious metals are ‘real’ assets and as such are considered hedges against inflation. Any breakout in inflation caused by central banks’ money printing efforts would see a quick rush to gold, which is considered a global reserve currency.

2. Don’t believe the hype

In October 2012, analysts were forecasting gold prices to continue surging from US$1700 to soon reach US$2000 and then US$3000 by early 2014. The gains were seen spurred by central bank buying, exchange-traded funds and physical demand for jewellery from China and India.

However, the bullish sentiment turned more bearish recently, with analysts at Goldman Sachs and elsewhere rating gold a “sell”. Despite the gloom, an industry survey by Thomson Reuters GFMS predicted the gold price would rebound to US$1800 later this year due to concern over US monetary policy.

The world’s most famous investor, Warren Buffett, may hate gold as an investment, but for the rest of us it still pays to ignore the hype. Investors value safety and this is why the US dollar and gold prices rally during times of crisis.

3. Avoid theft risks

While gold, silver and other precious metals can be easily converted to cash, the risk of theft may deter some investors from acquiring large amounts. Fortunately, there is an alternative for those not wanting the inconvenience or risk of storage.

Australia’s Perth Mint has developed investment products allowing the purchase of gold, silver and platinum via its certificate or depository programs, as well as its Perth Mint Gold (PMG) products listed on the Australian Securities Exchange. Each PMG allows the investor to physically acquire one hundredth of a troy ounce of fine gold, with the price tracking the international spot gold price.

According to French playwright Moliere, “Gold makes the ugly beautiful.” By buying carefully and making it part of a solid portfolio of bank deposits, bonds, real estate and stocks, investors can ensure that the beauty endures.

[Sources]