Gold, South Africa, and the United States

Synthetic made gold crystals by the chemical transport reaction in chlorine gas. Alchemist-hp
Synthetic made gold crystals by the chemical transport reaction in chlorine gas. Alchemist-hp

By Drew Hendricks, (Twitter: @DrewHendricks)

WASHINGTON, Janaury 13, 2014  –  2013 was a bad year indeed for the gold bugs. After years of spectacular gains, gold lost roughly one-third of its value last year, a downward spiral spurred by talk of the Federal Reserve “tapering” its highly stimulative bond buying program. Gold remained weak the rest of the year, although it briefly upticked in September when the Fed temporarily backed of its taper threat due to political conditions on the ground.

Last month, as the market prepared for the Fed’s December 17-18 meeting – ostensibly to reset its plans for tapering its stimulus – the price of gold began to drop once again. But after the Fed’s meeting, at which officials announced plans for an initial monthly bond-buying cut of $10 billion – from $85 to $75 billion per month – gold began to stage a weak, sometimes halting, but now perceptible march back upward.

While gold’s current, weak uptrend has not yet been fully established, charts are looking better. As a result, some individuals and funds are slowly creeping back in to the yellow metal. While there are no guarantees that this new, almost-rally will continue in 2014, gold may have reached at least a temporary bottom indicating the possibility of some upside ahead. Here are a few reasons why investors might now be considering purchasing some gold as an investment.

  • Supply may soon drop. The threat of a South African Mine Workers strike loomed for much of the last half of 2013. If such a strike were to happen, supplies of gold could shrink, naturally driving prices up. Demand in 2013 has swelled by 53 percent while supply is down 6 percent. Some are predicting a gold shortage in the coming years due in part to the extreme popularity of the metal in recent years, 2013 notwithstanding.
  • The next predictable threat to the price of gold will be in March, when policy makers could vote to change the stimulus program. Even then, the vote may be to only reduce stimulus funds slightly, potentially leaving gold prices relatively intact. If Fed market moves are interpreted as intending to lower the value of the dollar and prompt inflation, such an action might be yet another reason to get into some gold as a hedge against inflation.
  • Following up on this notion, gold, which has historically been regarded as a store of true value, can act as a hedge against inflation. As Scottsdale, Arizona gold expert Eric Sepenek points out, currency values naturally decrease over time, thanks to the power of inflation. Gold tends to hold its value even as inflation negatively influences other investments, making it a potentially wise long-term choice. Consistently, gold is ranked as a top investment by at least one-fourth to one-third of Americans polled on the issue. The only other investment that consistently ranks that high is real estate.
  • Physical gold is safe, assuming you keep it in a secure place. Unlike other investments, which rely on the behavior of others to excel, gold is safe from human error. Like real estate, it is a piece of property a person owns and, short of physically losing it, most investors assume that it will at least retain its value over the years.
  • There is no right or wrong time. Because of gold’s long-term value, many experts say there’s never one wrong or right time to buy the precious metal. However, affordability is an important factor in the choice, as is availability. If investors wait too long, the price could easily rise and current supplies could dry up, leading to a missed opportunity.

If gold continues its current trend in 2014, investors may once again consider investing in gold as part of a balanced portfolio. However, as in all investing, opportunity is one thing and timing is another. It’s an old Wall Street adage that “the trend is your friend.” But in 2014, as always, it’s sound practice to determine the durability of a current trend, whether in gold or any other investment, before you leap.

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  • badbear

    Somehow, comparing the value of gold as a secure investment to the value of real estate as a secure investment does not breed confidence.
    Has this author been asleep since 2008?