Today, I went together with my great friend who wanted to exchange his gold coin in a jewelry shop. We drove to Satwa where Damas is accepting gold coins in exchange for cash. The gold coin is worth 5,500 dirhams (66,000 pesos). He bought it last January 2010 at a price of 4,300 dirhams (51,600 pesos). He made a profit of 1,200 dirhams (14,400 pesos), a staggering 28% profit. If he bought a million pesos worth of gold, he could have earned 280,000 pesos in just 1 1/2 year.
After a few discussion with him, I told him that I would consider gold in my investment portfolio and will give it a shot. What he did was just a simple buy and sell. He bought it in a jewelry store, paid it, and store it in a safe place. After more than a year, he just went to the jewelry store, sold it to them at current price less charges, then walk away with a profit of 28%. It is very simple that what you are going to do is just hold the gold until you need the money for personal or investment diversification and sold it. The big difference here of course is the profit. In banks, you will not earn a 28% interest in 1 1/2 year isn't? Here you can as clearly demonstrated by my friend.
When you buy a gold for investment, it must be a coin, a biscuit (small bar) or a bar. These type of gold when sold back again to the jewelry shop will have a higher selling value than personal jewelries like necklace, earrings, rings, etc. Also, the charges is lower for the gold coins, biscuits,or a bar in comparison against personal jewelries. One of the important things you need to do is that you MUST need to ask the jewelry shop if they are accepting gold when you are selling it to them. Not all jewelry shops are buying back the gold you bought to them. Also, the receipt is very important in selling back the gold to the jewelry shop.
While my friend had profited in gold, is it still viable to invest in it? Do you think gold has reached it's peak?Let us take a look at the price of the gold. Below is a chart taken from Gold Price1. If you noticed in the chart, the price of gold had increased dramatically in the last five years. The price has always been increasing except in year 2008 when US was hit by the subprime crisis. What I see in the chart is that the gold price has always been appreciating and in five years time, the price almost tripled in value.
Why do the gold keeps increasing? What are the factors affecting its price? Like most commodities, the price of gold is driven by supply and demand as well as speculation.
Law of Supply and Demand
Remember the Law of Supply and Demand? When the supply is limited but the buyers (demand) are plenty, the tendency of the price is to go up. On the other hand, when the buyers(demand) are plenty and the supply is limited, the tendency of the price is to go down.
Jewelry Demand
Two thirds of the demand comes from jewelry. India (called the heart of gold) is the largest consumer of gold in terms of volume accounted for jewelry demand. China is also increasing its consumption of gold and in some countries as well. Bullish price expectations and domestic inflation concerns, coupled with stronger currencies help to drive demand for both India and China.
(2)(3)
Investment Demand
Since 2003, investment demand has been the constant source of strong growth. In 2009 alone, investment in gold attracted $41 billion. There are a lot of factors why people are investing in gold. Investors believed that demand will outstrip supply, thus price will always increase. Also, investors believed that gold has the ability to withstand instability and risk.2
Technological Demand
Industrial, medical and dental technology demand is around 12% of the total global demand. Since gold has a very high thermal conductivity, half of the industrial demand arises due to use of electrical components.2 . We are seeing an explosion of interest in the use of gold in science and technology. Exciting breakthroughs are occurring regularly within some of the world’s leading academic and industrial institutions.(4)(5)
Supply
Mine Production Supply
When gold is being extracted from the mine field, it takes an average of 10 years before it will be place in the market. Also, when new mines are developed, they don't expand the current levels of global production but instead they replace the current production. For the past several years, average global mine production is 2497 per year.2
Recycled Gold Supply
Gold can be recycled through sorting, smelting then reformed again into various shapes for selling to the market. When gold is recycled, it normally becomes liquid upon reaching its melting point. It undergoes under a very high and controlled heat. Recycled gold can be as useful as the day it was mined.(6)(7)
Central Bank Supply
Central banks and international organisations like IMF owns 20% of the above ground gold as their reserve assets. While on average, the governments hold around 10% of their reserves in gold, they are net seller of gold to the market. However, in 2009 the governments has drastically changed from being a net seller into a net buyer. Western Europe and Northern America hold an average of 50% in gold for their external reserves.2
After a few discussion with him, I told him that I would consider gold in my investment portfolio and will give it a shot. What he did was just a simple buy and sell. He bought it in a jewelry store, paid it, and store it in a safe place. After more than a year, he just went to the jewelry store, sold it to them at current price less charges, then walk away with a profit of 28%. It is very simple that what you are going to do is just hold the gold until you need the money for personal or investment diversification and sold it. The big difference here of course is the profit. In banks, you will not earn a 28% interest in 1 1/2 year isn't? Here you can as clearly demonstrated by my friend. When you buy a gold for investment, it must be a coin, a biscuit (small bar) or a bar. These type of gold when sold back again to the jewelry shop will have a higher selling value than personal jewelries like necklace, earrings, rings, etc. Also, the charges is lower for the gold coins, biscuits,or a bar in comparison against personal jewelries. One of the important things you need to do is that you MUST need to ask the jewelry shop if they are accepting gold when you are selling it to them. Not all jewelry shops are buying back the gold you bought to them. Also, the receipt is very important in selling back the gold to the jewelry shop.
While my friend had profited in gold, is it still viable to invest in it? Do you think gold has reached it's peak?Let us take a look at the price of the gold. Below is a chart taken from Gold Price1. If you noticed in the chart, the price of gold had increased dramatically in the last five years. The price has always been increasing except in year 2008 when US was hit by the subprime crisis. What I see in the chart is that the gold price has always been appreciating and in five years time, the price almost tripled in value.
Why do the gold keeps increasing? What are the factors affecting its price? Like most commodities, the price of gold is driven by supply and demand as well as speculation.
Law of Supply and Demand
Remember the Law of Supply and Demand? When the supply is limited but the buyers (demand) are plenty, the tendency of the price is to go up. On the other hand, when the buyers(demand) are plenty and the supply is limited, the tendency of the price is to go down.
Jewelry Demand
Two thirds of the demand comes from jewelry. India (called the heart of gold) is the largest consumer of gold in terms of volume accounted for jewelry demand. China is also increasing its consumption of gold and in some countries as well. Bullish price expectations and domestic inflation concerns, coupled with stronger currencies help to drive demand for both India and China.
(2)(3)Investment Demand
Since 2003, investment demand has been the constant source of strong growth. In 2009 alone, investment in gold attracted $41 billion. There are a lot of factors why people are investing in gold. Investors believed that demand will outstrip supply, thus price will always increase. Also, investors believed that gold has the ability to withstand instability and risk.2
Technological Demand
Industrial, medical and dental technology demand is around 12% of the total global demand. Since gold has a very high thermal conductivity, half of the industrial demand arises due to use of electrical components.2 . We are seeing an explosion of interest in the use of gold in science and technology. Exciting breakthroughs are occurring regularly within some of the world’s leading academic and industrial institutions.(4)(5)
Supply
Mine Production Supply
When gold is being extracted from the mine field, it takes an average of 10 years before it will be place in the market. Also, when new mines are developed, they don't expand the current levels of global production but instead they replace the current production. For the past several years, average global mine production is 2497 per year.2
Recycled Gold Supply
Gold can be recycled through sorting, smelting then reformed again into various shapes for selling to the market. When gold is recycled, it normally becomes liquid upon reaching its melting point. It undergoes under a very high and controlled heat. Recycled gold can be as useful as the day it was mined.(6)(7)
Central Bank Supply
Central banks and international organisations like IMF owns 20% of the above ground gold as their reserve assets. While on average, the governments hold around 10% of their reserves in gold, they are net seller of gold to the market. However, in 2009 the governments has drastically changed from being a net seller into a net buyer. Western Europe and Northern America hold an average of 50% in gold for their external reserves.2
Conclusion:
Governments are now increasing their gold reserves. Investors continue to gulp a big chunk of gold supply. India's economy continues to grow and gold has been part of their culture. China's growing economy and other countries continues to buy a lot of gold. Breakthroughs in science and technology also will consume gold. Since gold production takes time before it can be sold to market, the demand may outstrip the supply especially now that the central banks are net buyers instead of net sellers.
Once my salary comes next month, I will buy one.
1http://www.goldprice.org/spot-gold.html
2http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/
3http://www.gold.org/investment/research/regular_reports/gold_demand_trends/
4http://www.gold.org/technology/innovation/whats_new/
5http://www.gold.org/technology/uses/
6http://www.electronicscrap.umicore.com/process/
7http://xrgoldrate.com/Gold_Recycling.html
At this time, the support level @1k may be broken as the $ is getting stronger. Wait a little time for the buying signal. My opinion.
ReplyDeleteCheers,