Why Buy Gold?

How gold can help make your nest egg safer.

The economic turmoil of the last 2 years has left many investors reconsidering gold as part of a balanced, more secure, investment portfolio.

Put simply, there is just no precedent for what has happened during - and since - the GFC, and although there are a lot of wishful thinkers in Canberra, London and Washington DC - the fact remains that the world is likely to be in for a rough few years, no matter what happens during the rest of 2010.

During this time, gold has been seen as a safe-haven for investors looking to protect wealth from the ravages of the global financial storm. The recent instability in Europe has been a classic cause of continuing nervousness amongst investors around the world.

Turning to gold

The recent global financial crisis has seen governments all over the world print enormous amounts of money to use in their stimulus programs. It is no coincidence that as investors lost faith in stocks and currencies, they turned to gold in a huge way, resulting in a massive surge in the Gold price in 2009.

There is always a strong demand for gold. Demand remains high and growing for government, commercial and personal use - in literally every country in the world. Apart from the massive demand for gold for use in decorative jewellery, there are hundreds of industries that depend on gold (for example, the computer industry).

So, strong demand and limited supply is what drives the price of gold all around the world. And this brings us to another reason to consider investing in gold: you know where you stand.

It's a good time to ask yourself: Should I hold gold right now?

We never purport to give personal financial advice (you should always seek independent advice, because everyones' financial needs are different) and in this column we'll investigate some of the reasons why you might want to balance your portfolio with some physical gold.

For simplicity, we'll talk a lot about gold below, but please bear in mind that the same basic arguments apply for all precious metals.

Let's get started with the basics - securing wealth.

Gold is physical store of wealth, and can balance your portfolio

Like real estate, shares, cash, collectables and the like, gold is one of the ways you can invest now in the hope that you will be able to reclaim your wealth later, when you need it.

But as you know, not all asset classes are the same. For example, investing in stamps is arguably a more risky place to invest wealth than, say, property.

Historically, because it is so rare, gold has been one of the more secure investments when it comes to protecting wealth.

At the very simplest level, investing in gold allows you to diversify your investments, making it less risky.

These days, you can take advantage of the characteristics that have made gold very attractive to own for literally thousands of years.

Now let's drill a bit deeper to find out why it might be a good idea:

5 reasons gold can help protect your nest egg.

Here are the top 5 reasons our clients tell us they like investing in gold:

1	Gold is a tangible store of your wealth, so it is an important way to preserve the value of your hard work over many years.
2	Gold has objective pricing so you can have complete understanding of how much your investment is worth at any given time.
3	Gold has very high liquidity, which means it is easy to convert to cash exactly when you need the money.
4	Investment grade gold bullion is GST free so there is no loss to tax when you make a purchase.
5	Although gold does not generate cash flow, it often experiences counter-cyclical capital growth. This means it tends to be a refuge asset that can help balance your investment portfolio in turbulent times.

We'll look at these important reasons one by one, now.
(But if you’re already convinced, head over to our online products page, or read about our metals accounts.)

A physical way to store your wealth

The first reason you should consider investing in gold and precious metals is that investment grade metals like pure gold are a tangible and reliable store of your wealth.

What does that mean, exactly? Simply that when you invest in gold, you are investing in a limited physical resource (there is a finite volume of gold in the world, which makes it scarce and very valuable). This is simply not the case for most other investment classes, which can be created - literally - out of thin air.

Take cash, for example. Governments can simply print cash to cover expenses and commitments – which often happens, and usually devalues a currency as a result.

Stocks and shares can be issued by companies, diluting the value of existing stock. Whenever money is printed or shares are issued, the value of cash or stocks can be affected.

Gold, on the other hand, has a finite volume in existence, and cannot be simply created by decision. It's a way to store your wealth through the power of its rarity.

The price of gold is objective - so you know the value of your investment.

Because the price of gold is determined by the market around the word, you always know the objective market value of the gold you hold in your portfolio.

You may like to contrast this to other investment classes such as property, or stamps – where the value of a property is highly subjective depending on the buyer and the context.

The base price of gold around the world or the “spot price” is in US dollars. The spot price is simply the market price for investment grade gold at a particular point in time.

Now, you will rarely be able to buy gold exactly at the spot price because unless you are trading in huge volumes, you will pay for a trader or broker (such as ABC Bullion) to manage the physical delivery and splitting up (barring) of gold.

That said, you will be able to get close to the spot price by using a trading company with scale, and identifying the right product for your needs. Of course, we are here to help you with that.

But knowing the value of your investment is just one aspect to having security. You really need to know that you can convert this value into cash at the moment you need it. This is what is called liquidity.

Liquid gold: You can turn your gold investment into cash at a moment’s notice.

Gold is highly liquid: you will always find a ready buyer to turn it into cash exactly when you want to sell. Contrast this to a property sale, which is usually not liquid at all because you have to wait to find a buyer and conduct a complex transaction. Of course, cash is also – by definition- liquid; however remember that the weakness of cash is that it becomes devalued in the instances of inflation.

At ABC Bullion, trading gold and precious metals is our main business. If you want to sell, we are here to buy from you. But of course there are thousands of other firms and individuals who are willing to buy gold at a prevailing price.

Did you know? Pure gold is GST and duty free

In the early 1970s, the Australian government deregulated the gold market so that individual investors could diversify their portfolios by investing in gold and precious metals (including silver and platinum).

In Australia, you do not need to pay GST on investment bullion as long as the bullion you are purchasing is classified as investment grade by the Federal Government (through registration of a hallmark).

The ABC Bullion hallmark is one of only a few of GST-free investment grade bullion hallmarks available in Australia, and is accepted by investors everywhere.

Of course, one of your hopes when you purchase GST-free gold as an investment will be for your gold to grow in value (appreciate)...

Appreciating Gold: How gold can grow in capital value over time

Although gold obviously can't give you a stream of cash flow during your investment, the long term movement in gold pricing may allow you to grow your wealth.

Certainly if you look to your right and play with the historical pricing charts, you will notice a strong appreciation in the price of gold.

Of course, like any investment, the gold price is also open to falls, especially in the short term.

However, if you look at this chart of gold prices in US dollars, and Australian dollars, you will see that gold has offered a competitive return, despite its status as a safe-haven investment.

Why some analysts are recommending a "buy" on physical gold right now

There are always many analysts who recommend a small but significant holding of gold in your investment portfolio.

Right now, there are probably more analysts recommending a “buy” on gold than probably at any time in the last 30 years. (A recommendation of “buy” means that they expect the price of gold to continue to rise).

Depending on the analyst, there are a few main reasons for their positive outlook on gold, and here are a few arguments we hear regularly:

•	Central governments are printing unprecedented amounts of money in response to the recent financial crisis. This has fuelled concerns that cash may lose value as a store of wealth, making gold much more attractive, relatively speaking.
•	Property in many major markets may not have fully adjusted in response to the financial crisis.For example, housing affordability in major cities (such as the major Australian capitals) has not improved substantially. Again, this may strengthen the relative position of gold if you think a property value fall is possible - or even likely.
•	India, which is responsible for a massive slice (some 40%) of the world demand for gold (largely due to its cultural appeal), is still growing in population and middle class wealth. Analysts who see this continuing therefore feel gold demand will be supported in the long term.
•	Major central governments show a commitment to buying major positions in gold reserves. For example both the Chinese and Indian government have made massive investments in gold in the past 12 months and appear to be planning to hold onto this asset rather than sell opportunistically. Analysts feel this strategy will support the gold price in years to come.
•	Gold production (supply) is in decline as reserves run out and new mining areas become harder and harder to secure. Analysts who feel that supply is decreasing and demand strengthening will often conclude that gold is a "buy" proposition.
•	The US dollar remains weak relative to most currencies. In many ways, gold can be seen as an alternative to the US dollar, so when the US dollar weakens, the price of gold generally strengthens.

Hopefully this page has explained a few of the reasons gold might make sense for you as an investor looking to diversify your portfolio and manage risk.

The information and commentary contained in this website is general in nature. Nothing in this website should be taken as personal investment advice and you should consult a professional advisor before making any investment decisions.