Should Investors add Gold to their Portfolios?

Proshare - Facebook Proshare - Twitter Proshare - Linked In Proshare - WhatsApp


April 05, 2012/ Reshu BAGGA, Proshare

All that glitters might not be gold, but the yellow metal is definitely shining brighter than ever before. Worries about European debt crisis haunted global stock markets for most part of FY11, making gold a safe haven buy for investors. From April-July 2011, it kept hovering in the range of US$1,331.33 to US$1,360.81 per ounce.

When Standard & Poor's downgraded US rating in August 2011, it led to a weakness in the dollar index. This action, coupled with the US Federal Reserve's operational twist and currency depreciation in some countries pierced gold prices.

Gold witnessed a strong rally at the international level till September 2011 which added to the sentiment. From September to December 2011, international gold prices however fell from a high of USD 1,923 per ounce to USD 1,594 per ounce.

The CPM Group in its 2012 Gold Long-Term Outlook report cited that last year marked the 10th annual average increase in gold prices. The past decade was a period of declining mine supplies, rapidly growing secondary supply, declining net sales of gold from central banks (turning to net purchases by 2008), declining fabrication demand, and significantly larger volumes of investment demand relative to previous decades.

After recording a lifetime high last year, the question now is will investors have to pay up more to add gold to their portfolio?

According to the CPM Group, gold prices are likely to remain high this year but they are unlikely to rise above the record levels reached in 2011 as increasing supply versus a bigger global pool of investors for gold are combining to put a floor under the market, and prices are expected to remain firm, without the parabolic rallies of the recent past.

The CPM report further added that in spite of soaring gold prices, China and India are expected to continue to buy gold in 2012 at the same levels seen in 2011. China is the largest mine producer and refiner of gold and one of the largest consumers of gold. Gold fabrication demand and investment demand in China are expected to grow at a strong pace over the next ten years, outpacing growth in domestic supplies from mines and scrap.

Gold is believed to be the most favorite investment option. Apart from its traditional importance in certain countries, gold investments act as a shield against economic downturn and crisis situation. Besides traditional options like purchasing jewellery or investing in gold bars and coins, plethora’s of new options are available like the Spot Exchange, Gold ETFs and also Gold Fund of Funds. 


Currently, with a larger number of global investors for gold, rise in supply is being equalized with demand which eventually is providing a support to gold and preventing it from any big decrease in value.

If the forecast in the CPM Group’s report is to be believed, then gold could enter into a consolidation phase after seeing a decade of long continuous rise in prices. Though it was highlighted that the uncertainty over worldwide economic conditions still prevails, there are no more fears that the global financial system will collapse. As such, investors have stopped buying into gold from a panic reaction mode.

Apart from trading in gold and silver, other precious metals that can be traded on include platinum and palladium. Gold and silver investors need to diversify as investing in precious metals means more than simply buying the "barbaric relics" that have served as money in the past.

For today's investors, there's a small window of opportunity to get in on both of them before prices really start to take off. As commodities and mining expert Peter Krauth recently explained, "soon virtually every substance vital to modern life will become enormously expensive and profitable for investors who know how to play it."

Palladium, element 46, is one of the platinum group of metals which share the characteristics of being chemically inert and physically heavy. Palladium is industrially important because of its ability to absorb up to 900 times its own weight of hydrogen gas, making it ideal for use in automobile catalytic converters.

Because of this use, its price peaked in 2000 at over $1,100 an ounce, at a time when gold was selling for around $250 an ounce. Currently its price is around $690 an ounce, which is much cheaper than platinum. That's why the automotive market is switching back to it. As much as 25% palladium can be substituted for platinum in catalytic converters, and that proportion has been increased to 50% in the laboratory.

Platinum, element number 78, is much heavier than palladium, checking in 20 times as heavy as water. As with palladium, its primary use is in catalytic converters, but it also has uses in jewellery and electronics. The price of platinum has traditionally been higher than gold's, and it soared to over $2,000 an ounce in 2008; currently it trades around $1,640, or just below gold.

Although palladium is twice as common as gold, only 200 metric tons of palladium and platinum are produced annually, less than a tenth of annual gold production.


Disclaimer/Advice to Readers:
While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the author’s best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This information is published with the consent of the author(s) for circulation in/to our online investment community in accordance with the terms of usage. Further enquiries should be directed to the author.


Related News