Tuesday, November 10, 2009

Investing in gold or platinum

gold and platinum
Gold is a special and fascinating commodity - a store of value, which is no debt. It cannot be printed and does not have any objective value. As a safeguard against deflationary downturn and inflationary spiral is the ideal protection against the financial meltdown.

Many people think that the recent rally in the price of gold is different than the previous. Escape to the safe harbor sent already several times the gold over 1 000 dollars per ounce. Traders highlight the unwillingness of the price fall below $1000 and large volumes of speculative options to purchase gold at a price of 1100 - 1200 dollars per ounce.

Price of gold continues to rise even in a situation where it should fall according to history. Price of gold usually increases with inflation. But inflationary pressures and inflation expectations has been eased nowadays. Economic recovery eliminating also second assumption that investors use gold to ensure the growing insolvency or deflation.

Let's have a look to Fed Fund rate - Fed's basic interest rate. Despite the growing economic activity, the interest rate are unchanged because FED does not want to risk of economic recovery. Rates will remain low long enough and excess bank reserves are key fuel for the inflation, which will gradually emerge.

Fed chairman, Ben Bernanke, spent a life studying the causes of the Great Depression. He will not want to do the same mistake. Historically, the Fed began to raise rates nearly 19 months after the unemployment rate reached a peak. At the current growth in unemployment appears to increase rates as a very distant future. Cheap money again stoking the economy.

Government debt

Governments have no other viable alternative. Next debt could trigger bankruptcy. The only honest system are tax increases and expenditure cuts - which is neither fiscally nor politically acceptable. Required expenditure restraint is even more unlikely. So long printing money appears to be the only viable solution.

By the way central banks have very little gold - China and Japan hold only a fraction of its reserves in gold. If the change only 10% of their reserves into gold, it would represent almost four times the quantity of gold reserves currently held by all the ETFs (exchange traded funds).

Shares of gold mines are traded at the same multiples of profits as in 2003, while the gold price is three times higher. Although gold is now at historic highs in nominal terms, after adjusting for inflation, is still 40% below its historical peak, reached twenty years ago.

Alternative to gold may be also platinum. A rare metal, has many similar characteristics and also may be supported by global demand for catalysts, which have been drastically reduced by the problems with the crisis. For easy investment in gold here is the list of gold ETFs and similar list of platinum ETNs.


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