If the so-called ?gold bugs?, investors who believe passionately in the long-term value of buying gold, are right, then this could be a good time to add a little glitter to your portfolio. Over the last five years the price of gold has more than doubled from US$250 to US$574 a troy ounce and it is still nowhere near its all time 1980 high of US$850 a troy ounce. In fact, there are many who believe it could double in price AGAIN!
Just because gold is cheap now when compared to 25 years ago doesn?t automatically mean that it is a good investment. However, there are three sound reasons to believe that prices will continue to soar.
Firstly, the growing economies of Asia and the Middle East have resulted in a huge surge in demand ? especially for gold jewellery. For proof one need look no further than global gold jewellery sales, which increased by 19% last year.
Secondly, a rising number of private investors all over the world have been putting some or all of their savings into gold as a hedge against economic or political instability and, in some cases, war. When investors feel the future is uncertain (as many appear to at the moment) demand for gold always surges. This is doubtless in no small part due to the fact that the price of gold tends to move in the opposite direction to virtually all other conventional asset classes ? making it ideal when investors wish to diversify.
Thirdly, the mining industry can?t keep up with demand. Last year?s figures show that in excess of 4,000 tonnes of gold were purchased, but only 2,500 tonnes were mined. What?s more, production is falling by an average of 4% a year and it will take the industry anything up to ten years to increase supply by the required volume. In the past, when demand outstripped supply, the shortfall was met by many of the world?s central banks. No longer. Countries, which had been disposing of their gold reserves, have slowed down sales or even stopped selling altogether. Some central banks, notably those of Russia, Iran and China, are actually believed to be buying bullion.
Although I believe that gold prices are likely to carry on moving upward, I would only suggest buying if you already have a range of other investments including shares, bonds and property. Furthermore, I wouldn?t necessarily advise buying gold coins or gold bars. The idea of owning a little ?hoard? may seem attractive, but gold in all its forms is expensive to ship, store and insure. Instead you may like to consider investing in one of the various gold mutual funds. These offer a cost-effective, convenient and potentially more lucrative way to benefit from any increase in gold?s value.
A good example of what a mutual gold fund has to offer is the top-performing Merrill Lynch Gold
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