At The SHEES GOLD AND DIAMOND LLC DUBAI , our expertise lies in assisting clients in comprehending and navigating the intricacies of the gold investment landscape. In this blog post, we concentrate on addressing frequently asked questions that our clients often seek guidance on.
For those delving into gold investment research, we trust that the detailed answers provided will offer valuable insights and assistance.
Gold, like all commodities, experiences fluctuations in value in response to market conditions, influenced by shifts in demand and supply. The demand for gold stems from four main sectors: jewelry, private investment, central bank reserves, and industry. Market conditions impact each sector differently.
Increases in the price of gold occur when demand surpasses supply, primarily driven by consumer and industrial demand and market instability. Approximately half of the world’s mined gold is used in jewelry. The substantial population growth in key gold markets, particularly India and China, has propelled demand. Although industry requires less gold by tonnage, the growth of hi-tech electronics contributes to a rising demand for supplies.
Market instability prompts private investors and central banks to purchase gold as a traditional safe-haven investment during uncertain or declining market periods. The 2008 global financial crisis saw significant central bank demand, leading to a peak in gold prices. Similarly, during the upheaval of the coronavirus outbreak in 2020, gold reached an all-time high when the stock market faced declines.
Conversely, declines in gold prices occur when supply exceeds demand. Increased confidence among investors and central banks in market stability often motivates divestment from gold. When investors anticipate continued global market growth, they may accept greater exposure to riskier investments. If the gold price falls below the economically viable extraction level, mines may close until prices recover, restricting supply.
The currency used to purchase gold also influences its price. The value of currencies, such as the British pound sterling, erodes over time due to inflation. Over the last two decades, the pound’s purchasing power has fallen against foreign currencies, effectively increasing the price of gold in pounds sterling. Additionally, the relative value of a currency against the US dollar, a global reference and reserve currency, impacts the price of gold in that currency. These currency dynamics contribute to the overall complexity of factors influencing the price of gold.
The value of gold, like all commodities, undergoes fluctuations in response to market conditions. While the ideal strategy is to buy when prices are low and sell when they are high, predicting all market moves is a challenging task.
Investors often turn to gold as a safe-haven during times of global financial and political instability, contributing to a significant increase in gold prices since the start of the millennium.
However, it’s essential for new investors to recognize that current prices are relative to recent market conditions and future projections rather than distant historical figures. Delaying or refraining from investment when prices are rising, in the hope that they will fall, exposes investors to the ongoing market dynamics that may continue driving prices higher. Making investment decisions based on a realistic assessment of current market conditions and future trends is crucial for navigating the complex landscape of gold investment.
The price of gold undergoes constant fluctuations, changing every few seconds during market trading hours. Referred to as the ‘spot’ price, it represents the live price of gold at a particular moment, primarily of interest to margin traders seeking to capitalize on minor price differences.
For investors, particularly those comparing gold prices over time, more pertinent are the prices declared at the middle and end of the trading day. The London Bullion Market Association’s (LBMA) ‘fixes’ are globally acknowledged as the definitive gold prices.
Numerous online resources provide access to spot and historic fix prices of gold, with the LBMA’s website standing out as an excellent and reliable source. Easy to navigate and rich in useful data, it offers investors a trustworthy reference for understanding gold prices and trends.
Similar to all commodities, the value of gold experiences fluctuations in response to market conditions. However, the overarching trend is evident: the price of gold has been on an upward trajectory for over fifty years.
This upward momentum has notably intensified in recent years. In 2000, a troy ounce of gold was priced at £184, a figure that surged to £1,382 by the close of 2020. Even when adjusted for inflation, this represents a remarkable increase of over 345%.
The world’s burgeoning population continues to drive demand for gold in various forms, including jewelry, investments, central bank reserves, and industrial applications. Concurrently, the available gold yet to be mined is diminishing, with estimates indicating that less than 25% of global recoverable reserves remain unexploited.
While the current demand is met through mining existing reserves, this supply is not inexhaustible. In the long term, as the supply struggles to meet escalating demand, the price of gold is poised to reflect this imbalance through sustained growth.
Diversifying investments is a well-known strategy to mitigate risk and enhance portfolio resilience. Financial advisors commonly recommend a diversified investment portfolio to spread both risk and potential benefits, reducing exposure to downturns in any single sector. This approach allows investors to maintain a mix of high, medium, and low-risk investments.
Financial advice is personalized based on the investor’s objectives and risk tolerance. It is not uncommon for investors to allocate a portion of their low-risk investments to gold as a hedge against other assets. While gold does not offer dividends or guaranteed returns, it often demonstrates an inverse relationship with equities, meaning it tends to rise when the stock market falls. This serves as a safeguard for investors against the risks associated with equities. The volatility observed in equity markets over the past two decades has led to gold significantly outperforming stocks, emphasizing its role as a valuable diversification tool.
Incorporating gold into an investment portfolio can be achieved through two fundamental methods. One approach involves holding shares of gold funds, often referred to as ‘electronic’ gold. This method facilitates easy buying and selling of gold shares, but, akin to most investments, may incur tax liabilities and expose investors to potential counterparty risks.
On the other hand, physical gold represents a tangible asset. Some companies provide segregated storage options for maximum security, and certain types of physical gold may not attract tax liabilities. However, holding physical gold entails ongoing costs related to storage and security. Additionally, physical gold is less liquid compared to ‘electronic’ gold, requiring more effort if one wishes to convert it into cash.
Investors often weigh these considerations based on their preferences and risk tolerance when deciding between holding shares of gold funds and opting for physical gold in their investment portfolios.
The ‘bid/offer spread’ refers to the difference between the buying and selling prices of an asset. This spread is a common feature in all tradable assets and is comparable to the variation between the price at which you purchase a foreign currency at the post office and the (lower) rate when converting it back into pounds.
In the context of gold, the bid/offer spread implies that if you buy gold at a particular price today and opt to sell it tomorrow, you won’t recoup the same or higher amount than your initial investment unless the gold price has risen by a greater margin than the bid-offer spread.
To mitigate the impact of the bid/offer spread, long-term investors are generally advised to consider physical gold investments. Allowing the gold price to increase over time and then selling the investment can effectively yield a profit for investors.
For those who may need rapid liquidity or wish to respond to swiftly changing market conditions, some providers offer solutions. The Pure Gold Company, for instance, provides a Buy Back Guarantee on all gold purchased through them, offering investors a measure of flexibility and assurance.
Historically, recessions that have depressed the stock market often coincide with a rise in gold prices. For instance, during the bursting of the Dotcom bubble in the early 2000s, when the stock markets experienced a significant decline, gold held its ground, staving off the slump that affected overvalued stocks and even rose more than 10% during that period.
Similarly, in the most recent financial crisis that began in 2007, lasting for two years, the S&P 500 index lost 56%, and the housing market crashed on both sides of the Atlantic. However, the price of gold increased by a quarter during that time. It continued to rise for three more years as uncertainty and fallout from the global financial crisis prompted many investors to seek the safe-haven asset.
While the price of gold is a critical factor to consider during economic downturns, the safety of alternative investments is equally important. The last recession, the deepest since the Great Depression, saw significant financial instability, including the first run on a British bank in over a century and government intervention to prevent the collapse of several lenders. The FTSE 100 experienced sharp declines. It remains uncertain whether equities will be a safer haven for investors in the next recession.
Long-term financial forecasting, including predicting recessions, is inherently uncertain, and past performance does not guarantee future results. Investors need to assess whether the factors that typically drive the price of gold, such as political and financial instability, global upheaval, and demand from both private and industrial sectors, are likely to recur in the near future, regardless of an impending recession.
Gold’s historical status as a safe-haven asset for centuries serves as a strong indicator of its resilience during recessions. When other assets linked to the health of the economy face challenges in lean years, the inherent value and stability of gold often come to the forefront.
This doesn’t imply that gold always experiences only upward movement during a recession. Depending on factors such as the recession’s duration, inflation, currency values, and supply and demand dynamics, there can be fluctuations within the recessionary period. However, in general, recent history has shown that the price of gold tends to either maintain its value or outperform other asset classes during times of economic instability.
During the severe and prolonged repercussions of the 2008 great recession, for example, stock markets plummeted, while gold began a significant ascent, rising almost 200% in four years. The recession in the early 1980s and the Dotcom bubble burst of 2000 also witnessed an increase in the price of gold as markets declined.
The economic impact of the coronavirus outbreak, with the subsequent decline in GDP and bleak recovery forecasts, provided a boost to the gold price, which rose by 16% in 2020.
As with any investment, it’s crucial to recognize that past performance is not a foolproof predictor of future results. Investors need to assess whether the fundamental forces that historically propelled the price of gold during recessions will continue to be influential in the future.
Have more questions?
We are here to help. Arrange your own one-to-one call with one of our expert gold brokers at a time that’s convenient to you.