Gold, the Shining Investment

Gold is like the reserve currency of the world. It has traditionally been used as a hedge against inflation and crises. Unlike most other commodities, most of the gold that has ever been mined, still exists in the world, and so like all investments its price is subject to supply and demand, and speculation as well.

 The biggest holders of gold are the central banks around the world, who still hold gold as part of their reserves. It is interesting to note that one of the countries with the largest cash reserves in the world, China, holds only 1.3% of its reserves in gold. Were China to increase its holdings in gold to a more significant degree, the effect on the gold price would be significant.

                                                             Image from www.mindmillion.com

 So how has an investment in gold done in the last few years? If you had invested $10,000 in gold in 1999, it would have increased to $38,300, an increase of 283% in ten years. If you had invested the same amount in US shares in the Standard & Poor’s 500 index, your $10,000 would have reduced to $8,600, a loss of 14% over the period.

 If we take our performance figures back a longer period of time, again gold does pretty well compared with almost any other kind of investment, as long as it is held for relatively long periods of time (five years or more). Taking the figures from 1979 to the end of 2008 (a time period which favours shares ) gold produced a return of 5.36% p.a. as compared to 11.92% p.a. for shares (a compilation of NYSE, AMEX & NASDAQ exchanges), and 5.89% p.a. for 3 month Treasury bills. If you take the figures from 1970 until 2010, gold has produced a return of 3,792% in the forty years, whereas the Dow Jones Industrial Average increased only 1,280% in the same period.

We should not get too hung up on figures, as they can often mislead, but the point holds true-gold has been a very good investment for long periods of time. It does not suffer from the same wild variations as a share portfolio, and will never lose all its value. Therefore gold should hold a reasonable percentage of any investment portfolios, of between 10-20%. Gold is an investment you can buy and then forget about, something you cannot afford to do with any other kind of investment.

The question is, how is the best way to hold gold? There are a number of ways of holding gold or gold equivalent from buying the shares of gold mining companies to purchasing ETF’s (Exchange Traded Funds), and other similar instruments. However, Luxury Hedonist believes that the best way to hold gold is either to buy gold coins such as krugerrands, but a better option is to buy gold bullion.

Gold bullion can be purchased through a Gold broker, such as Bairds in the City of London. You can purchase either an allocated or unallocated amount of gold. If you purchase an allocated amount of gold, the broker will purchase that specific amount of gold for you, and also charge you insurance and storage costs. However, if you purchase an allocated amount of gold, you are not charged any insurance or storage costs, which can amount to about 0.25% p.a.

                                                             Image from www.savvygoldtrader.com

 In conclusion, gold has been a fantastic investment for those who have invested in it. Although it will not pay a dividend or interest, it will never lose all its value, and over time it will rarely disappoint you with its returns.