In this world of bursting financial bubbles, trade wars, economic and geopolitical upheavals gold is still the best insurance you can have. When you go into the gold buying and selling game you need to understand how the markets work so you can take advantage of opportunities that come along. The gold market has gone through a couple of upheavals since the first gold rush.
The demand for gold has risen in China and India. This has a lot to do with the changes in the economy of those countries. As they continue to grow so will the demand for gold continue to rise. Why? Because as the economic circumstances of the people change for the better, they are more likely to be spending all the money on jewelry and investing in actual gold bullion.
There are a few key events that happened in the gold market that might help you understand how we got to this point.
- Gold went through its own bubble in 1980 but it seemed to be doing well except governments were a little afraid that the next one would cripple economies beyond repair. So, in 1999, the UK Finance Minister, Gordon Brown let slip that the UK government would be selling its gold reserves. Back then people did not regard gold as a viable investment option because it did not pay any yields. Treasury bonds were a much better investment because at least they had a 5% yield.
- All the traders went on a gold selling spree but what they did to preempt the government’s announcement was to sell gold short. In less than two months, the price of gold had plummeted to $252 per ounce. However, the price recovered and now, nineteen year later the price of gold is $1,257.60 per ounce. That is over five times the price. This is equivalent to a compound interest of about 10% per annum.
So why wasn’t everyone buying gold back in 1999 when the market price was at rock bottom? The tech bubble was about to burst and the price was unbelievably low. So people were moving their money into stocks and bullion. No other traded commodity has ever yielded the returns that gold has managed to produce between 1999 and 2018. Savvy investors got in while the prices were still low but there are still many more people who continue to trade in gold. Most other people did not take advantage of the 1999 dip when it happened because they did not understand the gold market that well. It sounded like it should be easy to become a buyer of gold but it really isn’t. Gold was known as something for the elite, the super-rich and heads of state but that all changed when the gold backed exchange traded funds (ETFs) was introduced. Technology has also done a lot to change the gold market. Before the advent of technology or the creation of ETFs investors were limited to coins that are small and compact enough to easily trade. EFTs gold amounts have grown from zero to 2,300 tonnes of gold between 2004 and now. ETFs are complicated and mostly speculative. If you do not have any experience with trading stocks then leave ETFs to professional traders and hedge fund managers. ETFs provide for short term investing in gold.
A decade later after the worst financial crisis in recent history, more people are rallying behind gold as a safer and better investment. Even the Germans who are notorious for being tight fisted when it comes to buying gold have had a radical transformation and now they are buying loads of gold.
Germany’s hunger for gold has grown substantially. They buy almost twice the amount of gold the Americans and the Chines buy. If more countries started buying up gold like Germany has been doing recently then the price of gold will be driven even higher than where it sits currently.
It’s not just Germany that has gone on a gold buying spree; Russia has also increased its own gold investments. Russia began buying gold back in 2006 before the 2008 financial crisis. Either they knew something or they were just reading the markets and economies right. They have managed to add more than 1,400 tons to their stockpile. With the rising price of gold over the last 12 years, Russia has managed to increase its gold investment from $7.5 billion to a whopping $73.6 billion. Russia is currently sitting on 17.3% more goal in its reserve than it had in 2006. This translates to $424.8 billion. Russia isn’t the only country that has increased its stockpile, China has also been adding tons of gold to its own reserves.
There is a high demand from everywhere not just from governments, but from new individual buyers of gold and from emerging markets. It is important to keep an eye on what is happening in these countries – they might be the new gold investment power brokers in the globe. What they do with their reserves can have an immense impact on the economies of their countries and the world in general.