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How and Why to Invest in Gold?

By: Greg Matthews

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Gold prices are on the tear these days along with gold futures briefly touched one more record recently at just above $1,249 an ounce - a level that might have seemed a distant prospect only a year back.

Yet there isn't any sign of resurgent consumer rate inflation in U.S. economy, or in economies of most other countries.

This time around, therefore, gold isn't serving like a protection anti inflation, the way it did in the 1970s. However an increase in gold rates that is so sustained has to mean something. Divining that meaning will advise us what we can expect from the global economy and markets in years to come.

Though we have not looked at consumer price inflation, in the last 15 years we've witnessed an exceptional increase in the U.S. as well as international money supplies. Starting 1995 to 2008, the U.S. broad money supply expanded 40% quicker than the country's gross domestic product (GDP).

Then, in late 2008, the U.S. Federal Reserve completely opened the monetary spigots doubling the financial base in a matter of weeks. Internationally, more or less all nations embarked on financial development in 2000, and opened the spigots still further during late 2008.

You could see the effect in world central bank reserves: They've expanded with a rate of more than 16% every year since 1998, and stood at an total $8.09 trillion at the end of last year.

Now consider those central banks for one minute. They control an exceptional amount of funds, more or less all of which can be deployed in brief-term foreign currency assets.

That leaves the central bankers with an unenviable alternative:

They can deposit their money in U.S. dollars, which can be subject to a record budget deficit that's showing no sign of being brought under control.

They can put their money in euros - plus watch the European governments as well as the European Central Bank (ECB) organize a bailout adding up $1 trillion used for a nation - Greece - whose GDP is just one 3rd of that amount.

They can put their money in Japan, a country whose public debt exceeds 200% of GDP, that's as well running vast budget deficits and that's blessed through a government who really wants to run still larger deficits in addition to isn't satisfied through interest rates approximately zero.

or they could place their money in China, a country whose currency will not be freely traded plus where inflation is flattering a genuine problem.

Of course, there are two well-run countries like Canada and Australia, but among them they are distant very small to offer home for everything close to $8 trillion.

Instead, central bankers be able to put their money in gold - an asset that has enlarged in price by greater than 20% annually since 2000, and that shows no signs of ceasing to do so.

Rationally talking, those central bankers will put at least part of these funds in gold.

The problem is that - even on these exalted prices - the yearly production of gold is just $120 billion in addition to the overall world stock of gold is value only $6 trillion. So with the world's central banks stepping up buying, mostly clandestinely, you can see how the gold price is more likely to go much, a lot higher.

The dangers of investment in gold or mining futures have though increased within the last few months. The Greek crisis and also the European Union bailout have pumped even more money into the organization, which is why gold - despite yesterday's profit-taking - have been given a further boost during the last 1 week.

However, the uncertain outcome from the markets to the EU bailout of Greece has increased the risk of a liquidity crisis such as we suffered in 2008, in that risk premiums increase sharply. While gold can in general be likely toward have the benefit of an increase in risk premiums, its cost would drop back the way it does in 2008 if there was a liquidity crisis caused by a major collapse of an bank or country.

For the moment, therefore, gold has become a speculative plaything - instead of a safe supply of value. Investors shouldn't contain greater than 15% to 20% of their net worth in gold or gold-related assets, in case everything goes wrong.

Article Source: http://depositarticles.com/

Conversely, since there is a chance of a sharp "spike" in the price of gold, the current opportunity is probably one that shouldn't be missed. But knowing how volatile gold can be, its essential to have an exit strategy in place before you buy gold. Otherwise, your paper can vaporize in a matter of days, or worse, turn into losses. For more information on how to trade gold with proper downside protection, please try www.GoldMarketMonitor.com Gold Market Monitor is a subscription based membership site that uses an exclusive gold timing strategy. It shows its members the best time to invest in gold bullion or gold stocks and when to exit to the safety of cash. Try the Gold Market Monitor for 60-days and safely profit from up and down trends in the gold market.

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