This article seeks to set down what is the best time to invest in gold.
We will firstly determine the asset class that Gold fits into. Seondly, we will list down its characteristics and trend behaviour . Thirdly, we will discuss how does gold investment fit into your overall portfolio. Last but not least, we will nail down the all important question of What is the best time to invest in gold.
Generally, there are a few asset classes for your investment portfolio which you would need to be aware of. They are cash or cash equivalents, equities, bonds, real estate, commodities. Moreover, these can be further divided into sub classes. For example, commodities can be broadly divided into 3 sub classes of Precious Metals, Energy and other commodities, simply because all 3 have slightly different characteristics which justifies further classification. We can also divide equities into 3 sub classes. They are defensive stable dividend paying stocks, growth stocks, high risk speculative new venture stocks
For a balanced portfolio, it is always advised that you have some investments in all of the above mentioned classes.
So, which asset class does gold fall into. Gold is a very unique asset. It falls under the commodity class and specifically the precious metals sub class. However, it also can be cash or cash equivalents, as a universal store of value. In this respect, it can be traded as a forex pair like XAUUSD, XAUJPY.
Characteristics and Trend Behavior
We will discuss the characteristics for gold as an precious metals asset class, characteristic for gold as an cash or cash equivalent and its trend behaviour
Characteristic of Gold as a Precious Metal
The main characteristics of the commodity class is that it does not pay anything for holding it. It does not bear interest. Neither does it pay dividend. You make a profit mainly from the difference in the price you bought and the price you sell.
Another characteristic is that its value is primarily driven by market demand and market supply. For example, in the case of soy beans, when demand shifts up, the price goes up. And if, there is a supply shock, for example natural disasters affecting soy bean plantation, the price goes up too.
Another characteristic is that there is physical delivery of the commodity that is purchased.
However, Gold is also part of the sub class of Precious Metals which has an additional characteristic of this sub class. This is limited supply. Because it is mined, there is a limit to how much supply there is. You will find that this is especially so for the case of gold. So, in the case of gold, its price is determined more on the demand side, rather than the supply side.
Characteristic of Gold as Forex
On the other hand, its value is also determined by performance of other currencies. That is, when there is a crisis in Japan, gold expressed in japanese yen would go up much more.
Trend Behaviour to determine what is the best time to invest in gold
Gold will reacts to the following factors, namely crisis, currency devaluation and period of high inflation
In periods of severe crisis, its appeal as a safe haven would cause the price of gold to skyrocket. This is because it is universally accepted and is impervious to what happens in the world. Therefore, in a crisis, when confidence is eroded, flight to safety would mean funds will start flooding into gold
b. Currencies devaluation
During times when fiat currencies are devalued, Gold will automatically rise against such currencies. So, for those who are in countries where their currency is being devalued, the best way for them to preserve their wealth is through gold holdings.
c. Period of high inflation
You will also find that Gold performs exceptionally well in times of high inflation, especially due to supply shocks. You will notice that it rocketed during the 1970′s oil crisis. What’s more, you see that it made an all time high (in real terms) in 1981 before drifting back down.
Furthermore, you will notice that inflation was going through the roof during that time. So much so, that the Fed chief at that time have to increase interest rates dramatically to curb it.
How It fits into your overall portfolio
You should have some exposure to gold as part of your portfolio. Gold is usually counter-cyclical. When equity prices is high and gold prices are low when the economy is steaming ahead, you would need to rebalance your portfolio. This is done by cashing out some of your other investments which seems over-extended and put into gold. This is to protect your overall investment portfolio, when troubles come and equities are taking a beating, your gold investment can help.
What is the best time to invest in gold
I believe you would have already guessed it from the above.
For long term investors
For long term investors, the best time to invest in gold would be during periods of calm before the storm. This is the time when the price of gold would be lowest. During this period, slowly accumulate gold. Hold off or slow down your purchases when the storm breaks. When the storm seems to being resolved, you can either opt to sell a portion of your holdings to lock in profits or wait for prices to come down before accumulating again.