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Serious Investors Know That Gold Is Not Just A Fair-Weather Friend

May 6, 2015

fair-weather friend is someone who is pleasant and profitable, but who will turn against you or walk away at the first sign of trouble.

We might all know someone who is a bit like that in our circle of friends, but as serious investors know that analogy is not an accusation you can throw at our long-term trading partner, gold.

In it for the long-haul

It is hard to argue that the price of gold is often a fair barometer of market sentiment and often reflects the level of risk appetite that a lot of investors have at a certain point in time.

This chart produced by Macrotrends shows the performance of gold against the performance of the NASDAQ, Oil and the FHFA Housing Index and provides a fair illustration of why so many experienced and savvy investors consider it essential to have exposure to gold in their investment portfolio.

If you had added gold to your portfolio 36 years ago, the value of your retirement fund that is invested in gold, would have increased by 1737% overall and by 322% over the last 15 years.

There is no point denying that the price of gold has taken a downward turn in the last couple of years, mainly due to the fact that the stock market has enjoyed a healthy injection of cash from the Federal Reserve and an upturn in the economic outlook.

Wrong call

The pressure on gold prices has seen some analysts suggest that the Midas Metal has had its time in the sun and that the precious metal will stay out of favor.

Any investor with a long-term memory or an understanding of how market cycles in all stocks and commodities can quickly change, will see that the predicted demise of gold would be the wrong call to make.

Strong demand

There is plenty of evidence to demonstrate that the demand for gold has definitely not gone away and there are plenty of international investors with a strong appetite for buying gold at prices that may look cheap if history is anything to go by.

Historic trends – new buyers

It is important to pay attention to what is probably the leading story relating to gold over the last decade, the migration of gold from West to East.

Investors in China and India have a long-held passion and cultural tradition that involves the continual acquisition of gold. Sales of coins and bullion have increased by over 20% in China and over 50% in India when prices were low.

There is also a very interesting historic trend that makes the surge in demand even more interesting from an investment point of view.

Jim Willie is a respected gold analyst, and aside from noting that gold and international power continue to go hand in hand, he also notes that gold’s movements are very much in line with historic trends.

The fact that the gold price is still on-track within the usual performance cycle does tend to put the bearish comments about the future of gold prices, into question.

Market Manipulation

The first important point to note when considering the case for gold, is the effect that central bank policies have on determining stock price movements.

Now that the Fed has finished pumping money into the financial system, adding $3.5 trillion to the balance sheet according to a Bloomberg report, and the dollar has strengthened in response, this is perceived as bad news for gold prices.

Sense of Perspective

Gold had been on a 12-year bull run up until the last quarter of 2013 and a 36% fall from peak prices might have some nervous investors pressing the sell button and heading for the exits.

A sense of perspective is needed, especially in turbulent times where there is market volatility and a reminder of the fair-weather friend analogy would be good.

The price of gold gained 660% between 2001 and 2011, which makes the 36% drop seem like a bump in the road rather than a sign that gold has lost its shine, especially when you look at the long-term performance and enduring popularity of this precious metal.

Timing is everything

Buying into gold is no different to buying stocks, if you are looking for a quick return and timing is everything in that scenario.

If you had joined the gold bull market even up until the middle of 2010 you would have still come out on top, despite recent falls but after 2010, you may have had to make do with a break-even or loss situation.

Having gold in your investment portfolio and staying in the game for the long-haul, is a strategy that has been utilised by many successful investors who consider that holding a percentage of gold, provides them with a good hedge against market volatility and also provides long-term growth on their investment.

Some of these same savvy investors have viewed the recent drop in gold prices as an excellent opportunity, as they say, timing is everything.

Predictable Cycles

It is amazing when you consider how prices can fluctuate, that gold tends to work in 8-year cycles, and this is playing out this time round as well, despite unprecedented levels of central bank financial stimulus, applying pressure to prices at certain times.

A historical overview demonstrates that gold prices consistently hit a low price area every 8 years before recovering. There are also often significant spikes in the price in-between the low points and during bull market runs, gold often stays above the high reached before the 8-year low point is hit.

These predictable cycles help make a case that gold can often get oversold at certain times, but it is highly likely to reward you for your patience if you take the professional investors view, which is always a medium to long-term outlook for best returns, rather than trying to predict short-term movements.

Many reasons to hold gold

As an Investopedia article outlines with 8 reasons why you should own gold, there are solid arguments that support the favorable opinions and plenty of justification for holding gold as part of your overall investment strategy.

It is quite clear that the price of gold can be volatile in the short term, history has shown that it has maintained and increased its value over a longer period and serves as an excellent hedge against inflation and the erosion of major currencies.

10% exposure to gold

Frank Holmes, who is the Chief Investment Officer of U.S Global Investors, suggests a 10% rule. This is a suggestion that investors should maintain a 10% exposure to gold in their portfolio and within that weighting, 5% should be in gold bullion and 5% should be in gold stocks.

He describes demand for gold as “fear trade” and “love trade”. Very simply, this when investors buy gold coins or jewelry out fear of worsening economic indicators or buy gold simply because they have an enduring love for the metal.

Either way, it can be a win-win situation for gold investors who can profit from both of these scenarios that will drive prices up in response to demand.

How to gain exposure

There are four main ways to invest in gold and here is a look at all of them and what they offer to investors.

Exchange-traded funds

ETF’s have enjoyed a surge in popularity with investors who are looking for exposure to gold and this is mainly due to the fact that the structure of ETF’s minimizes your costs and eliminates any problems related to physical storage of gold.

There are a good number of ETF’s to choose from on a global basis and they offer you the choice of physically-backed funds and products designed to achieve exposure through gold future contracts.

In addition to these, there are several ETF’s available for investment, which specifically offer you the opportunity to invest in the stocks of companies which are directly engaged in the gold extraction process.

The reason why these ETF’s offer you exposure to these companies and can be considered by experience investors as a worthwhile risk-reward strategy, is that their profitability is dependent on prevailing market prices, which means there will sometimes be considerable volatility in price movements.

Physical Gold

Some investors understandably find it difficult to move away from the comfort-factor they might feel by actually owning physical gold bullion.

Hold physical gold is a strategy that ensures the value of your asset will move directly in unison with spot gold pricing, without the need for futures contracts.

Another advantage of holding physical gold is that it has a high value-to-weight ratio, which means that it should be reasonably inexpensive to store a material amount of gold bullion.

You need to factor in storage costs to your purchasing decision and if you decide to buy gold coins instead of bullion, you need to appreciate that there may be a premium involved in buying the coins.

You can also gain exposure to physical gold through ETF’s, as their assets will consist of bullion stored in vaults.

Gold Stocks

Another way of investing in gold is to buy shares in gold miner stocks.

You will often find that gold miner stocks will mirror spot gold prices and are often used as a leveraged play on the underlying commodity. It goes without saying that you will need to research each company before you invest and take some professional investing advice if you are not sure.

Gold Futures

If you want to trade in gold futures, you will likely be trading on the COMEX, the primary market for trading metals such as gold, silver and copper.

The COMEX is considered to be one of the most active and liquid futures markets in the world, which is important as it should allow you take a position and get matched on prices, with a high level of liquidity.

COMEX gold futures are based on physical delivery and trading ends on the third last business day of the delivery month.

Related Article

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Elizabeth Goldman is a finance writer and day trader. She contributes to several top finance blogs and trading communities across the web including and

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