Why gold is rising, and how you can buy some

June 18, 2010

Lesley Ciarula Taylor

The price of gold has zoomed up 15 per cent this year, a far better performance than stocks, bonds and many other commodities.

Mario Tama/Getty Images

Other than the few grams in your wedding ring or your birthday earrings, why does the increasing glitter of gold matter?

The price of gold has zoomed up 15 per cent this year, a far better performance than stocks, bonds and many other commodities. It’s on its best winning streak since 1920, hitting a record $1,258.25 an ounce in London on Friday morning.

1. Can average consumers buy gold for investment?

The Royal Canadian Mint is Canada’s prime seller of gold bullion, although only the bullion wafers are sold to the public. The price right now is $1,414.51 for a one-ounce wafer.

Because the mint has its own refinery, it has avoided the shortages of other country’s mints, spokesman Alex Reeves explained. Gold is bought from Canadian companies in lots, and the price is fixed based on the buying price.

The mint also sells gold coins to the public as collectors pieces with a price that reflects the quantity available, the price of gold and the craftsmanship. The mint has an international reputation for the purity of its gold products.

“Demand has been very strong,” said Reeves. “2009 was an extraordinary year.”

As gold prices have climbed, though, the mint has seen silver purchases rise as well, he said.

2. Why is the price rising?

“When you have currencies weakening and there's no currency of choice (among traders), you move to gold,” said Carlos Sanchez, an analyst with CPM Group in New York.

Gold is “the ultimate safe-haven currency” given “eurozone debt worries,” said Bayram Dincer, a commodity analyst at LGT Capital Management in Pfäffikon, Switzerland.

“We are still very bullish on gold,” said Hwang Il Doo, a senior trader with KEB Futures Co. in Seoul. “Gold will remain the main beneficiary of what’s happening in Europe unless the picture takes a turn for the better.”

“The biggest reason to buy gold is credit and sovereign risk and also just diversification out of currency exposure,” said Walter de Wet, an analyst at Standard Bank Plc in London. “Liquidity continues to increase and will help support gold’s trend higher.”

“There are increasing concerns that Europe’s debt problem may be prolonged,” said Chris Yoo, manager of global derivatives team at Samsung Futures Inc. in Seoul. “Gold is preferred as a safe-haven asset.”

3. What else affects the price of gold?

U.S. numbers showing a slowdown in manufacturing growth and an increase in unemployment had an impact. But psychology and sentimentality also play a role.

Unlike other commodities, gold has been with human societies since the beginning of time,” wrote analyst Sham Gad. “Empires and kingdoms were built and destroyed over gold. In short, centuries of history have given gold a power unlike any other commodity on the planet. And that power has never really disappeared.

“In investing, you can't ignore the effect of human psychology when it comes to gold. Gold has always been a go-to investment during times of fear and uncertainty.”

4. Is gold always a good investment?

Gad would say no.

“The main problem with gold is that, unlike other commodities, gold does not get used up. Once gold is mined, it stays with you. A barrel of oil is turned into gas and other products that are used up. Grains are used to feed us. Gold, on the other hand, is turned into jewellery, used in art, or stored in vaults. Jewellery can be melted to make other things, but gold's chemical composition is such that it cannot be used up. The only way gold disappears from our society is if it is lost or buried.

“Because of this, the supply-demand argument that can be made for commodities like oil, copper, grains and so forth doesn't hold up for gold.”

Then again, Mark Twain’s advice about land – buy it, they aren’t making any more – holds for gold, too. It’s rare and hard to fine. Next to silver, it’s the best conductor of heat and electricity and most reflective of light. It’s one of the world’s most inert metals and also one of the most malleable. A single ounce of gold can be fashioned into a wire 56 kilometres long.

5. Will the price keep going up?

Eighteen of 20 traders, investors and analysts surveyed by Bloomberg, or 90 per cent, said bullion would rise next week. None forecast lower prices and two were neutral.

On the other hand, gold prices hit $850 an ounce in 1980, which would be $2,200 in 2010 dollars.

Last year, James DiGeorgia, publisher of the newsletter Gold and Energy Advisor, predicted $1,200 an ounce by the end of the year but HSBC analyst James Steel countered that a rise over $1,000 had always meant it fell back under that benchmark. Steel has been proven wrong.

6. Who buys gold?

Jon Nadler, a senior analyst with Kitco bullion dealers in Montreal, said India, the world's largest market for gold, saw its imports fall by two-thirds in 2009. The steep decline in imports in India is “precisely because of price sensitivity,” Nadler said.

Analysts believe a lot of the investment into gold is coming from hedge funds, because they need to put their money somewhere.

Low rates of interest on savings and low borrowing costs mean gold becomes attractive, analysts said.

Western financial advisers tend not to suggest gold as an investment. In China and India, it’s different.

In the weeks before the Diwali Festival, for example, gold purchases increase in India.

Indian farmers are also big gold customers after harvest, to keep their profits safe.