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GOLD RUSH
By Pauline Yong
and most stable currency. But, is it worth investing in gold now, given that the market price
for an ounce of gold has risen over US$540 from US$275 five years ago? Before we answer
that question, let us go through the reasons behind the rapid rise in gold prices.
Gold prices historically rise when people lose faith in paper currencies. (In the 80’s, inflation
drove gold prices to US$850 per ounce.) This is especially true now when we are
experiencing the cost push inflation that caused by rising oil prices.
Moreover, since the outlook for US dollar isn’t bright and clear due to their historically high
current account deficits, people starts to take shelter from gold.
By Pauline Yong
and most stable currency. But, is it worth investing in gold now, given that the market price
for an ounce of gold has risen over US$540 from US$275 five years ago? Before we answer
that question, let us go through the reasons behind the rapid rise in gold prices.
Gold prices historically rise when people lose faith in paper currencies. (In the 80’s, inflation
drove gold prices to US$850 per ounce.) This is especially true now when we are
experiencing the cost push inflation that caused by rising oil prices.
Moreover, since the outlook for US dollar isn’t bright and clear due to their historically high
current account deficits, people starts to take shelter from gold.
Gold Chart 1975 - 2006
Since 2001, the US Fed has been easing their monetary
policy or increase money supply. This has created excess
liquidity. When there is too much money around, the price
of gold generally rises as people try to maintain purchasing
power against the effects of inflation.
In addition, there is a shortfall in supply of gold by the
largest gold producing country -South Africa. This is
because the gold price was low during the 1997 – 2002
period, hence, lack of exploration for gold since then.
Moreover, it takes time for the gold industry to respond to
the rise in gold prices. According to experts in this field, the
average lead time for a large discovery to go on-stream
production is around five to seven years. Many current
gold miners are relying on the discoveries that were made
many, many years ago as the cost of exploration is high.
As a result, they are not replacing the reserves that are
mining every year.
So, is it worthwhile to invest in gold? The answer is ‘Yes’.
Investing in gold is a form of diversification in your
portfolio. Over the long term, a portfolio allocation of
about 10% to gold reduces overall volatility, improves
returns and provides a form of portfolio insurance. Unlike
traditional insurance or hedging strategies, gold is an asset
rather than an expense. Its value can never decline to zero.
Now, back to the question of whether it is the right time to
invest in gold? Personally, I think it depends on how the
world tackles the macroeconomic problems. If US dollar
continues to get weaker, coupled with weaker stock
markets and greater inflation, there is a great chance that
gold price will move higher.
However, some analysts in the Wall Streets believe that the
current US$540 per ounce is too high and they expect a
correction in the next two years before continuing their
upward trend. Sources from The Wall Street Transcript
state that the average gold price in the next two years will
be around US$460 per ounce.
In Malaysia, for those who want to invest in gold, the best
way is to buy physical gold. For example, Maybank offers
Kijang Emas Gold Coins, where investors can invest
directly in gold and at the same time to treat it as collectible
items. For those who have excess to the foreign share
markets, you may want to invest in gold mining
companies in Australia and Canada by purchasing directly
from their share markets.
No matter what the gold price is for 2006, put some
portion of your assets in gold is definitely a great way to
diversify your portfolio.
policy or increase money supply. This has created excess
liquidity. When there is too much money around, the price
of gold generally rises as people try to maintain purchasing
power against the effects of inflation.
In addition, there is a shortfall in supply of gold by the
largest gold producing country -South Africa. This is
because the gold price was low during the 1997 – 2002
period, hence, lack of exploration for gold since then.
Moreover, it takes time for the gold industry to respond to
the rise in gold prices. According to experts in this field, the
average lead time for a large discovery to go on-stream
production is around five to seven years. Many current
gold miners are relying on the discoveries that were made
many, many years ago as the cost of exploration is high.
As a result, they are not replacing the reserves that are
mining every year.
So, is it worthwhile to invest in gold? The answer is ‘Yes’.
Investing in gold is a form of diversification in your
portfolio. Over the long term, a portfolio allocation of
about 10% to gold reduces overall volatility, improves
returns and provides a form of portfolio insurance. Unlike
traditional insurance or hedging strategies, gold is an asset
rather than an expense. Its value can never decline to zero.
Now, back to the question of whether it is the right time to
invest in gold? Personally, I think it depends on how the
world tackles the macroeconomic problems. If US dollar
continues to get weaker, coupled with weaker stock
markets and greater inflation, there is a great chance that
gold price will move higher.
However, some analysts in the Wall Streets believe that the
current US$540 per ounce is too high and they expect a
correction in the next two years before continuing their
upward trend. Sources from The Wall Street Transcript
state that the average gold price in the next two years will
be around US$460 per ounce.
In Malaysia, for those who want to invest in gold, the best
way is to buy physical gold. For example, Maybank offers
Kijang Emas Gold Coins, where investors can invest
directly in gold and at the same time to treat it as collectible
items. For those who have excess to the foreign share
markets, you may want to invest in gold mining
companies in Australia and Canada by purchasing directly
from their share markets.
No matter what the gold price is for 2006, put some
portion of your assets in gold is definitely a great way to
diversify your portfolio.
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