These four simple recommendations will help you to invest in precious metal with benefit without getting into a golden trap.
When it comes to investment into commodities, most of all disputes are kept about gold. Though it is also derided as a barbarous remnant, it is necessary to remember that the most part of western countries' history the anchor of their economies there has been always gold. Nevertheless, its value decreased after the final destruction of the gold standard in 1971 according to the USA presidential decree of Nixon, investors still keeps an interest in the precious metal.
Investments into gold are difficult and require a lot of knowledge. I hope, these four recommendations will be useful to you.
1. It is necessary to understand, what factors influence the price
Gold isn’t similar to other types of raw materials. The precious metal is unique: it practically has no industrial application. Yes, it is impossible to forget about jewelry and the electrical engineering, but the main demand is created by investors.
That is why the price of gold and the stocks depending on it substantially is a derivative of the currency rates: the strong US dollar, as a rule, conducts to reduction of price, and vice versa. The dollar is under the influence of various factors, including monetary policy, a ratio between the American and world economy and deficit of trading balance. Each of these factors is difficult to forecast, but, planning stock investment in gold mining companies, it is necessary to understand the communication of gold and the exchange markets.
2. Remember: gold isn’t always useful
Gold deserves a place in any well-balanced portfolio as a hedging instrument against inflation. Nevertheless, often investors who were nicknamed «gold bugs», become obsessed with precious metal and allocate it too large share in investments.
Historically, gold kept value much better than paper money but lost its power during the long bear periods. It doesn’t assume any earnings so it is only capable to protect the equity, but not to increase it.
Don’t make this mistake. A quantity of gold will help you to be insured against inflation, but don’t overdo it.
3. Correctly appraise gold mining
If it is necessary to add gold to a portfolio, the investor can purchase papers of the fund for gold traded on the exchange, for example SPDR Gold Trust (NYSE MKT: GLD), or indirectly to invest in gold, having taken stock of the company which financial progress depends on the precious metal price.
These are generally gold miners. Their financial performance strongly depends on the difference between the market price of gold and the prime cost of production. Often, especially during the bull market of gold to get it is much cheaper than to purchase. The investors interested in production shall know how it is correct to appraise such companies and neighboring risks.
Speaking about expenses, gold miners usually use two separate indicators: cash costs and total costs for production maintenance. The second is more useful as it includes some production costs, which aren’t considered in cash costs. Total costs are a quite good method to estimate the prime cost of production for the specific company.
Low expenses, it is, obviously, a good sign, but it is worth paying attention and for other things. Total production and a geographical position of mines are important too. Unfortunately, the considerable part of the production is in unstable regions. For example, AngloGold Ashanti (NYSE: The EXPERT) recent years have suffered from fixed strikes on mines in South Africa.
Some companies excavate not only gold, but also other metals so the price of their stocks is under the influence of price of other raw material types. One hedge gold production, limiting potential growth while others don’t do it. For example, Goldcorp (NYSE: GG) doesn’t practice hedging at all that increases risks and makes the company very sensitive to price movement of yellow metal, but also provides higher income when gold becomes stronger.
4. Study the Internal Revenue Code
Bureau of Internal Revenue of the USA considers gold ingots as a special type of investments and considers it a collectible, it means that the sales tax of gold bullion can reach 28%. The same concerns and the exchange-traded fund. Be convinced that the tax legislation of your country won’t create you additional inconveniences in case of investments into precious metal.