Given the undiminished allure of the yellow metal — and interestingly, neither silver nor platinum have registered the same sharp rally in price as gold — one has to look into the different strategies available for investing in gold to make it an ultimate safe haven. Are there any special factors involved in gold purchase that sets it apart from other conventional investments such as real estate or government bonds? The fact is that gold has a special place in human history for its ability to shine, use and its scarcity. Throughout history it has been the favorite of both the nobility and the poor. It has entered into everyday language to denote something special, as evidenced by the use of the word "gold" by promoters of chocolates, coffee or credit cards. Who would wish to promote "Tin Blend Coffee"?
People also have an ingrained memory about the value of gold as an "inflation buster", partly stemming from the period of the gold standard before the dollar became the currency of international trade and a peg for other currencies, whereby under the gold standard central banks were kept in check in their ability to print only those notes backed by sufficient gold reserves. However, historical inflation data also reveals that gold underperformed inflation, especially in periods when the market and the public in general, believed that central banks were in control of events in monetary policy. The key then was trust and confidence as noted at the outset of this article.
For those readers who are facing a trust deficiency in the ability of central banks to restore monetary confidence, there are many ways in which to invest in gold, besides buying the odd lump of it and assuming that you keep this physical investment somewhere safe. Exposure to gold in today's financial markets can be through exchange traded funds or ETF's. These are essentially shares in a diversified investment portfolio which includes equities. Because gold ETF's are effectively one-tenth of an ounce of gold, the market can accommodate small purchases. One advantage of ETF's is that it tracks gold prices closely, and the only issue for investors is the level of charges and the credit worthiness of the fund managers. Other forms of gold investment are through so-called structured notes in which the investor does not actually own the gold, but instead is exposed to a structure where the return is based on the performance of gold.
Gold investment can also be carried out through allocated and unallocated gold accounts. The former is one in which the gold that an investor owns is so-called "ring-fenced" from the credit worthiness of the institution in which it is stored. This appeals to investors who wish to go to bank vaults and see their gold bars stored separately, but this form of allocated gold is an option open only to the super rich, and is more cumbersome than holding an ETF. Unallocated gold is a simple way of trading gold through trading room orders, with gold added or deducted from an investors account depending on the orders made. Again, this type of account is more open and suited to institutional investors such as hedge funds, pension funds and sovereign funds, as the minimum amount to be dealt are large, and in the range of 1,000 ounces of gold per deal. Small time investors wishing to have a chat with dealers about the ups and down of the gold market, and hoping to buy a few unallocated ounces will be given short shrift.
This year has certainly propelled gold into the headlines, and ongoing global uncertainties and a lingering "fear deficit" has ensured that the yellow metal is once again a favorite to both individuals and institutional investors ....