Investing in gold: the how and when of it

, Finance

Precious metals make for an aspirational set of commodities and gold is their king. The yellow metal is a symbol of power as well as wealth and has been so for ages. People want to own and invest in these commodities to increase their wealth. To ensure that your investment in gold pays off, there are many factors that you should consider while buying it.

Gold as a commodity, in particular, is quite safe a bet. Of course, there are fluctuation in its prices, but they are not as drastic as the volatile bitcoin. The reason is that the metal has been around for a long time and is globally traded. The fluctuations observed in the spot gold prices depend on factors that can be easily largely predicted with some level of accuracy.

Firstly, gold is a precious metal and its rarity is what makes it even more valuable. The stock of gold rises every year only by approximately 1.75%. This limited supply and the recycling are the only two sources of meeting all the demand for gold in the world. Apart from its use as an investment and in jewelry, gold also has many industrial uses. Being an inert metal, it is not prone to corrosion and also exhibits high conductivity. Gold is influenced majorly by the demand side. A change in the supply and demand make the prices move.

Now, this relationship between supply and demand forms the basis for all the other reasons there are that make gold prices to change. The central banks across the world, have huge amounts of gold reserves as do the gold mining companies. They trade the metal as per the price movement and this also has an impact on prices. Governments also release and buy gold to stabilize their currencies. Therefore, they need to have these reserves to maintain stability in the economy.

The strength of dollar has a huge impact on the prices of gold as well. As dollar weakens, investors across the globe dump it and buy gold to hedge their wealth. This increases the demand for gold and consequently a rise in its prices. On the other hand, if the dollar strengthens, investors do not need to buy gold and the demand falls as does its price.

Then there is the state of the economy of a country in particular or the world in general. For instance, during the Euro crisis, people holding a Euro were at a vulnerable position as there was high inflation. The value Euro was falling and there was no certainty at what point it would stabilize. In such a situation, they would like to trade it for gold in order to safeguard the value of their possessions. This increases the demand for the commodity leading to higher prices.

The per capita income of a nation also affects the gold prices. With an increase in the per capita income, the disposable income available to the people goes up. This is a time when people invest in luxury goods and precious metals like gold and silver is one such category. Therefore, in this scenario the demand for gold goes up and so does its price. On the other hand, if the rate of unemployment increases, incomes decrease, and demand for precious items decreases along with its price.

Government policies can also impact the prices of gold. For instance, recently, the Indian government had to put a cap on the gold imports in order to stabilize the rupee, which was falling continuously against the dollar. The purchase of gold was releasing more rupee (Indian currency) into the market that was hitting the already falling rupee. Government’s policies increased the taxes on gold imports. The increased prices, constricted the supply of gold to the domestic market. The high demand and reduced supply, pushed the prices further up.

There are many other factors that can affect the prices of gold in the global market. These include the purchasing power of the people, national emergencies among others. All of these factors affect the demand and supply of the metal and thus, impact its prices.

Now, the next obvious question that arises is that with the rising and falling prices of gold and other precious metals, what is the right time to make an investment? Well, this depends on you and the reason for which you are putting in your money. You should know that when you consider investing in precious metals there are two ways you can do it. You can either directly buy the metal or you can invest in the derivatives that have the precious metal as the base commodity.

Now, in the former case you can just buy a block of gold and keep it in a safe. However, bear in mind that this is not an investment since it is not going to create wealth for you. You do not buy gold today and sell it tomorrow to make a profit. It is either bought with the purpose of personal consumption as jewelry or to hedging risks that arise from currency crashes. In either cases, you do not have to wait for a particular time to buy the metal. If you feel that you have to buy jewelry or that your investments are going to fall, you just go ahead and buy it today.

On the other hand, if you are looking for making an investment in precious metals, you do that by investing in their Exchange Traded Funds or ETFs. Now, an ETF also derives its value from the underlying precious metal. However, since it is traded on the market, it is also influenced a lot by the investor sentiment. Now, the value of an ETF would ideally depend on the future demand of the metal, global politics as well as uncertainties attached with mining. But, these factors cannot possibly be known and it boils down to the market sentiment, that is, what the market thinks.

Therefore, time is of essence in this situation. Before buying an ETF, you have to take care and study the market trends to analyze the current value of the futures, be aware of the predictions and track important events, like an election, and make sure that you understand the impact of it on the derivatives market. Once you have made your choice by studying your options, you should set a target selling price. Once you reach that target price, make sure you sell those ETFs. You should ideally wait for approximately three months, after which you should terminate your position. At that time, you should take the best option available to you at this time and exit.

Investing in the markets is not for everybody since it needs a certain level of understanding, interest and patience to profit. Precious metals make for a volatile investment. Keep your eyes and ears open to the market movements so that you know when to pull out. Again, you should consider investing in them once you have made a fairly big portfolio that has many stable and dependable investments. If you start with precious metals you are making your investments volatile and that is never a wise move. Therefore, play in this market only if you know what you are doing.