Investors have gushed over gold for the past six years or so but in the 1990s hedge-fund managers and bankers were – as they still are – far more interested in short-term, high-yield investments in stocks and shares.
Gold was not always the golden boy of investment. In the 1970s, bullion prices were as low as £14 an ounce – a remarkably small figure considering today's value of more than £1,000. Inflation and economic stability play their part, but what other factors might affect gold prices this year? More to the point, will gold continue to be the safest investment of 2012?
Safety in Numbers
All investors should realise that there is no real safety in numbers. Historical data and short-term trends are liable to change with little or no notice. Gold investment is certainly more of a gamble in some respects than stocks, shares and liabilities, largely because high prices are subject to returns that are usually small, gradual and inversely affected by economic stability.
The problem is that many investors believe gold bullion peaked in 2011. Since last year, prices have dropped to just above £1,000 and some analysts are predicting a more severe crash. Gold is by no means a safe investment but even if there is a crash, it might just be the safest.
Risk Aversion
The main advantage that investing in gold has over stocks and shares and other assets is that price changes tend to be gradual. The value of bullion is constantly changing, but sharp falls are usually tempered by occasional spikes and long-term gains. Gold investment on a large scale is really all about risk management.
2012 ought to be much the same as 2011 in terms of gold prices, but the 509 per cent increase that was observed between 2001 and 2011 is unlikely to happen again until the next major economic downturn. Risk-adverse investors, still sceptical about the viability of short-term investments in stocks and shares, should continue to put their faith (and money) into the gold market whenever possible because the commodity serves as an excellent hedge against exchange-rate changes, currency problems, inflation and recession. The main problem for gold investors is that while bullion is a safe enough bet for the next three, five or perhaps even ten years, demand continues to be frustrated by supply. There is hardly an abundance of gold in circulation, so high demand is helping to prop up prices. Investors late to the game will not enjoy the same opportunities to buy at rock-bottom prices as those who invested wisely in the commodity before 2006, so returns will be minimal over the short term. The problem of supply and demand was illustrated by the recent downturn in the fortunes of several leading gold mining companies, whose value on the stock exchange has fallen accordingly. Daniel Whitmore writes and advises on gold price movements for a number of websites. His fascination with the price of gold started in 2008 during the financial crisis and hasn't stopped writing since.
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