Should you continue to invest in gold? November 29, 2012

Investors have become accustomed to the continuous rise in gold prices. Since the beginning of 2000, the value of gold has risen from around $300 per ounce to over $1,700. But is it still an attractive investment? 

According to analysts' forecasts, gold remains a key alternative investment whose prices will continue to rise. In the first quarter of 2012, we saw a price correction, which led to a massive update of forecasts for 2012. However, most of them still predict increases. 

However, what are the reasons behind these increases? An important argument in favor of the increase in the value of gold is the loose monetary policy of the United States and the European Union. Successive programs designed to stimulate the economy and save it from entering a recession, involving the "printing" of money, are causing the dollar and euro to fall in value and contributing to inflation. It should be noted that causing inflation is necessary for the United States and many European countries also because of their high debt. Through inflation, they reduce the real value of their debt, and such actions can be called an inflation tax. 

Gold, on the other hand, as a store of value and a commodity whose value is expressed in dollars, is an excellent hedge against the negative effects of government actions. 

This fact has been noticed by the BRIC countries (Brazil, Russia, India, China). These countries have huge currency surpluses, but hold relatively few reserves in gold. Gold accounts for only 1.6% of China's foreign exchange reserves, while the United States holds 74.5% of its foreign exchange reserves in gold, and the eurozone average is 62.6%. Already in 2011, we saw large purchases of gold by the BRIC countries, but their purchasing potential is enormous. Increasing China's gold reserves to 10% would involve the purchase of approximately 5,500 tons. With annual gold production at around 2,500 tons, this would mean purchasing more than two years' worth of production. Increasing the gold reserves of all BRIC countries to 30%, which is less than half of what the eurozone has today, would mean purchasing approximately 24,000 tons of gold. Considering that all gold resources mined to date are estimated at around 160,000 tons, we are talking about the purchase of 15% of the world's mined resources, and this is only due to the demand created by the BRIC central banks. To this should be added the increasingly wealthy societies of these countries, for whom gold has always been associated with wealth and social status. It should therefore be concluded that the forecasts for gold price increases are based on solid fundamentals and that this precious metal should become part of every investor's portfolio, not only those interested in alternative investments. Especially since, according to research conducted by the World Gold Council, holding up to 20% of gold in your investment portfolio significantly reduces your overall investment risk.