In the last year the precious metal gold has increased in value in unprecedented proportions. Last week gold hit an all-time high of about $1306 an ounce.  Gold has been so popular that in Dubai there are even gold vending machines. You can actually buy gold from a vending machine like you buy soda or a snack.

The gold run up has been blamed by fears of inflation, the dollar and as a hedge from the stock market. The main culprit according to an article by Reuters is the rich! Like a 16 year old girl with a Black Card the rich has been buying gold in huge amounts. They are buying so much gold that laleprechaun  all over the world are hiding their gold. According to Reuters article entitled Super-Rich Investors Stocking Up Gold by the Ton:

“The world’s wealthiest people have responded to economic worries by buying gold by the bar — and sometimes by the ton — and by moving assets out of the financial system, bankers catering to the very rich said on Monday.

Fears of a double-dip downturn have boosted the appetite for physical bullion as well as for mining company shares and exchange-traded funds, UBS executive Josef Stadler told the Reuters Global Private Banking Summit.

“They don’t only buy ETFs or futures; they buy physical gold,” said Stadler, who runs the Swiss bank’s services for clients with assets of at least $50 million to invest.

UBS is recommending top-tier clients hold 7-10 percent of their assets in precious metals like gold, which is on course for its tenth consecutive yearly gain and traded at around $1,314.50 an ounce on Monday, near the record level reached last week.”

The article will have you believe that the rich are the ones causing the run up on gold. However the Wall Street Journal paints a different story. According to the Wall Street Journal it is institutional investors behind the run up in gold.  Institutional investors include college endowments, pension funds and mutual fund companies.  According to the Wall Street Journal article Gold Mania? Not Quite, by Brett Arends:

“According to Financial Research Corp., a Boston firm which tracks the data, investors poured $7.4 billion into gold bullion through exchange-traded funds from the start of the year through the end of July. Nearly all of that went into State Street’s SPDR Gold Trust.

But a lot of that money came from big institutions like pension funds, hedge funds and mutual funds. According to State Street, these account for at least 45% of the investment in GLD these days. Individual members of the public probably accounted for only about half the new investment, or $3.7 billion.

The public has also been buying gold coins and bars. According to GFMS, Ltd., the London-based consultancy that produces the most authoritative figures, U.S. investors bought about 45 metric tons of gold bars and coins in the first half of this year. This is less than they bought last year.”

There you have it we have two different news outlets that are blaming the gold run up from two different sources. Which source is current? Both seem to be plausible reasons as to why gold has had source increase in price lately. Both institutions and individual investors have caught the gold bug.

Goldman Sachs has forecast that gold will hit a new high next year. Goldman Sach’s believe that an ounce of gold will be worth $1,650 in 12 months. As of today the price of an ounce of gold is $1354. Therefore if Goldman is right that same ounce can provide investors with a $296 or a 22% return!

However Billionaires Warren Buffet and George Soros think that gold is overrated and that it will decline is value. So why is gold such a big deal? Gold is one of the oldest currencies in the world. In actuality gold is actually money. In ancient times, societies used gold like we used dollars. Gold was so precious that nations went to war over it. Even the United States used the gold standard until 1971. It was during this time that Richard Nixon officially took the United States off the gold standard.  In reality our dollars are not really money but I.O.U.’s backed by national debt.

Therefore in times of risk and uncertainty one of the first places people with means run to is commodities such as gold.  Gold unlike the dollar cannot be created out of thin air. Either you have it or you don’t. Because of this gold has the ability to retain its value. In order to decrease the price of gold you must find a new supply. Without a new supply and/or an uptick in demand you have an increase of price.

The government is left with a catch 22. In order to stimulate the economy you need either consumers to spend, business to spend or the government to spend. All are major factors that make up our GDP. If the consumers are unemployed and business are scared to spend because of lack of demand. The only option one is left with is more government spending. The government has been spending and spending trying to bring life into the economy. Each stimulus creates more dollars into the economy.  These dollars flood the system and thereby decreases value of the dollars you have in your pocket. Therefore the rich who have a lot of dollars and assets have a reason to be concerned. The rich don’t want to lose the buying power of their dollars therefore they invest in things such as gold that can uphold its value.

Should you invest in gold? Yes and no! Yes, if you have done your research and feel like it will continue to increase in value due to concerns over the economy and government stimulus actions. No, if you are just following what the rich are doing. In my experience as an investor the followers are almost always late to the party.

If you do decide gold is an investment you would like to try you can invest in two ways. You can invest in gold exchange traded funds (please do your research before investing). Some of the top gold exchange traded funds are:

SPDR Gold Trust (GLD)

iShares Gold Trust (IAU)

ETFS Physical Swiss Gold Shares (SGOL)

All three provide you as an investor with an inexpensive way to buy gold. You can buy these ETFs for below $200. All three actually own gold billion. The SPDR Gold Trust has over 5 billion in assets under management. It is the second largest ETF. The price of gold goes up and down like stock based on supply and demand, therefore it is important that you know the risk before you invest your money. The second way to invest in gold is buying the actual gold. You will need at least $1354. You can buy gold directly from the government. The U.S. mint sales gold coins directly to investors. Therefore you can purchase your gold and actually have the gold in your possession.

It will be interesting to see what happens to gold in the next year. However now you will be more informed to make an investment decision.

Notes

Reuters

http://www.cnbc.com/id/39510784/Super_Rich_Investors_Stocking_Up_Gold_by_the_Ton

Wall Street Journal

http://online.wsj.com/article/SB10001424052748703843804575534010291489910.html

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