This article will help you decide when is the best time for gold investments.
First, we will determine which asset class Gold belongs to. We will then list its characteristics and trends. Third, we’ll discuss how gold investment fits into your overall portfolio. We will also address the crucial question of when is the best time for you to invest in gold.
Asset Type
There are generally a few asset types that you should be aware of when building your investment portfolio. These include cash, cash equivalents, equities and bonds, as well as real estate and commodities. These can also be sub-classed. Because each commodity has slightly different characteristics, it is possible to divide them into three sub-classes of Energy, Precious Metals and other commodities. You can also sub-classify equities. These are growth stocks, dividend-paying stocks that provide security, and high-risk speculative venture stocks.
It is a good idea to have investments in all the classes mentioned above. This will ensure a balanced portfolio.
Which asset class is gold? The unique asset of gold is rare. It is a commodity, and more specifically, a subclass of the precious metals class. It can also be cash, or cash equivalents, which is a universal store value. It can also be traded in forex pairs like XAUUSD or XAUJPY.
Trend Behavior
We will be discussing the characteristics of gold as a precious metals asset, its trend behaviour and characteristic for gold cash or cash equivalent.
Precious Metal
It does not pay any money for its possession. It doesn’t bear interest. It does not pay dividends. Profit is primarily made from the difference between the price you purchased and the price that you sell.
Another characteristic of the product is its ability to be valued primarily based on market demand and supply. Soy beans are an example of this. If there is a shift in demand, the price will go up. If there is a supply shock (e.g. natural disasters that affect soy bean plantation), the price will also go up.
Another characteristic is the physical delivery of the purchased commodity.
But, gold is also part the subclass of Precious Metals. This subclass has an additional characteristic. There is a limited supply. Due to the fact that it is mined there is a limit on how much there is. This is particularly true for gold. In the case of gold, the price of the metal is determined more by the demand than the supply.
The Characteristics of Gold as Forex
However, the performance of other currencies can also affect its value. This means that gold expressed in japanese dollars would rise more in times of crisis in Japan.
Trend Behaviour determines the best time to invest gold
The following factors will affect gold’s response to gold: currency devaluation, crisis, and periods of high inflation
a. Crisis
Its appeal as a safe haven in times of crisis would cause gold prices to soar. Because it is universally accepted, and impervious to all that happens around the globe, this is why gold’s price will soar. In a crisis when confidence is low, funds would flood into gold to escape the danger.
b. Currencies devaluation
When fiat currencies are devalued gold will rise against these currencies. For those living in countries where the currency is being devalued it is best to hold gold.
c. Period of high inflation
Gold also performs well during high inflation, particularly when there are supply shocks. It will be obvious that it soared during the 1970 oil crisis. You will also notice that it reached an all-time high in real terms in 1981, before falling again.
You will also notice that inflation rose dramatically during this time. To curb inflation, the Fed chief had to dramatically increase interest rates.
How it fits in your overall portfolio
Your portfolio should include some exposure to gold. The contra-cyclical nature of gold is common. You would need to rebalance if equity prices rise and gold prices fall when the economy is booming. You can do this by taking out excess investments and putting them into gold. Your gold investment can be a great way to protect your investment portfolio in times of trouble and when equities are suffering.
When is the best time for gold investment
You would probably have guessed it from the previous.
Long term investors
The calm before the storm is the best time for long-term investors to invest in gold. The price of gold will be at its lowest during this time. Slowly accumulate gold during this time. When the storm hits, you can delay or slow down your purchases. You have two options: sell some of your holdings to lock up profits, or wait for the prices to drop before you start accumulating again.
For medium term investors
Medium term investors should invest at the first sign that trouble is coming and then get out as soon as possible.
