Investing in Gold (II)2010 Jun 9
The upper limit of the price is even more difficult. In our times gold is not founded in streams as was shown in the movies. Now gold is mined from the deep earth and separated from gold dust, metal ore or rock. In nature gold is founded in different levels of concentration. The concentration of gold is higher the extraction is economically more useful. It is more worthy to extract gold from less concentration ore when gold prices are higher. And that means, when gold prices are raising, the supply of gold also is rising. However, it is sufficiently long-term process.
Still, it draws some certain limit for gold price - a growing supply sooner or later will have a negative impact on the prices. Although the gold that was extracted does not disappear anywhere later, but the demand is also growing as well similar to the number of people in the earth. According to statistics, approximately three-fifths of the extracted gold is used in jewelry industry, one-fifth of other industries (electronics and similar), and the remaining one-fifth goes to investment and hoarding. Thus, mainly the demand of gold depends on jewelry industry, but the prices are affected also by gold bought for investment purposes. When gold prices are rising it has some affect on jewelry industry - expensive jewelry is a negative factor for demand.
Still, even current situation is a gold investment bubble it is hard to say when it will burst. Maybe this process has already begun, but maybe the gold prices are just started to rise to new highs and investing in gold will be even more and more popular. But even if you chosen to invest in gold, you shouldn’t forget, that also are some other investments that might be even better.
Considering the level of the risk and return over the long run investing in gold doesn’t look as good as does stocks or bonds. However important is the fact that gold may have some advantages compared to another investments: under some catastrophic circumstances like the Third World War or a nature disaster of similar scale: the bonds would lose their value in real terms very quickly and become worthless because of inflation, the prices of stocks would collapse as well because of the stock market crash, the real estate (if it still would be in the place) also would follow the stock market as well and cash that was stored as investment under the bed would become just waste paper.
In such catastrophic situation only those would not regret, who buried few ounces of gold in the basement. So if you believe in doomsday scenario...
Rokas Lukosius - investing book author
Read the first part
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