Why to Invest in Gold Stocks
The economic uncertainties of recent times have many people considering investing in gold stocks for the first time. For thousands of years, gold has been used as a monetary system by cultures on nearly every continent. Until 1971, the gold standard was the primary factor for determining the value of the currencies of many countries. In addition, sophisticated investors understood that the best way to protect their investment portfolios against financial unpredictability was to invest in assets such as gold.
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Modern History
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After World War II, the major countries of the world decided to established standards for the global monetary system. Their efforts resulted in the Bretton Woods Agreement, which required each nation-state to implement a monetary policy that would establish a fixed value for its currency. The United States agreed to set the price of gold at $35 per ounce. Therefore, the currency of the other countries was tied to the value of the United States dollar, and as a result, the price of gold.
When the United States decided to move away from this system in 1971, a fiat currency system emerged worldwide. Instead of currencies backed by a tangible commodity such as gold, the value of currencies was now contingent on what someone was willing to pay for them. The value of fiat currencies is subject to the whims of economic trends and conditions.
Supply and Demand
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There is growing concern about the declining stock of global gold supply. There were more than 84 million troy ounces of gold in the world supply in 2001. The available supply of gold fell to an estimated 77 million troy ounces in 2008. From 2007 to 2008, there was a 64 percent increase on the global demand side for gold, which includes bars, coins and exchange-traded funds. ETFs are funds backed by the purchase of gold bullion.
Basic supply and demand dictates that as the demand for gold increases, the price of gold may rise. Along with capital preservation, this is perhaps one of the best reasons to invest in gold mining companies that own the gold yet to be extracted. -
Recent Significance
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In the 1980s and 1990s, gold was not seem as very desirable by many investors. Its decline in the eyes of investors coincided with the growth and development of the world financial markets. In recent years, gold has climbed back into the forefront of investment opportunities. Many financial experts believe that the problems incurred in worldwide economies and monetary systems have systematic issues that are not likely to go away any time soon. Historically, when financial uncertainty become apparent as it relates to currencies and banking, many investors typically invest in gold, silver and other valuable assets as a means of protecting their capital.
Gold Stocks
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There are several way to invest in gold. Many investors choose to invest in gold stocks of individual mining companies. These stocks are usually very volatile when compared to the S&P 500. Therefore, investors must have the ability to analyze an issue and the company before investing, to minimize risk while enhancing their investment portfolio. These individuals are generally the more knowledgeable investors who have the time and understanding to look at the fundamentals of various gold mining companies, including financial data, company management and operation efficiency.
Gold Indexes
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The Amex Gold BUGS Index (HUI) is a popular vehicle for investors who invest in gold stocks. It is comprised of a basket of 15 companies that are primarily engaged in the mining of gold. The gold inventories produced by these companies cannot be hedged out more than one and a half years. Gold stock indexes were created to give investors an opportunity to profit from the short-term volatility inherent in gold stock prices. The gold indexes are less volatile than individual gold stocks. The Philadelphia Gold and Silver Exchange (XAU) is also a gold index that is heavily traded.
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