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Precious metals such as gold and silver have been in high demand ever since the real estate bubble began to negatively affect the stock market in October 2007. The metals offer investors something tangible and real that ordinary folks feel they can quantify. Ever since the gold standard was eliminated in 1971, precious metals are thought to be more of an investment and not directly linked to a currency. When the real estate bubbled popped, it resulted in a tremendous amount of uncertainty in the global financial markets, as many believed the system was going to collapse. Many investors flocked to precious metals because they are tangible assets that offer some security away from the equity markets.
Gold in particular has shown a long-term growth trend since the end of 2001, offering investors some protection from currency devaluation and instability in the financial markets. Investing in precious metals has been aided by the creation of ETFs that provide an easy and simple way for the retail investor to participate in this sector. The top precious metal ETFs in the financial markets include Global X Silver Miners (SIL), Proshares Ultra Gold (UGL), SPDR Gold Shares (GLD), ETFS Physical Swiss Gold Shares (SGOL), Powershares DB Gold Fund (DGL), Powershares DB Precious Metals Fund (DBP), iShares Silver Trust (SLV), Powershares DB Silver Fund (DBS), Powershares DB Gold Double Long ETN (DGP), and ETFS Physical Asian Gold Shares (AGOL).
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Besides purchasing an ETF, investors can participate in the sector in other ways such as acquiring the metal individually or by purchasing a derivative such as the stock of a mining company. Many opt to buy the all-encompassing DBP ETF that tracks the DBIQ optimum yield precious metals index excess return. This allows the buyer to spread out their money and invest in all the metals as opposed to being exposed to the risk of just one asset.
Investing in gold is a prudent strategy for many average investors because it shields them from currency risk and central bank intervention. When central banks print money, the money supply increases, thereby bringing down the value of the dollar, which usually results in the appreciation of gold. In this shaky economic environment, many ordinary investors have come to the realization that gold is an essential part of any portfolio.
Precious metals offer good diversification in a portfolio and are included in many “doomsday funds,” as they provide protection against catastrophic scenarios. Gold and silver have become so essential that some folks have gone way beyond just buying the securities in the open market and have actually started mining for the metals! That said, individuals such as premier miner Todd Hoffman, who started mining when the credit crisis hit, has actually made a fortune doing so.
According to a report published by Denver Gold Group in 2010, the typical gold investor is a college graduate, upper income professional, between forty and sixty-five years old, and could be either male or female. About 90 percent of people buying gold coins and bars in industrialized nations fall into this demographic. The vision of a survivalist hoarding gold along with guns, ammunition, and dehydrated food is a gross mischaracterization of gold investors. The “guns and bunkers” investors represent only a small percentage of gold buyers.
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According to a gold article from MarketWatch in November, it stated that twenty-five-to-thirty-five year-olds are the fastest growing segment of buyers of physical gold. Much of the buying comes from the fear that has been generated as a result of the real estate crisis. Gold is believed to be an asset that will appreciate when economic cycles fall into troughs and should be part of everyone’s portfolio during these uncertain times.
Many analysts forecast gold to exceed $2,000 an ounce as central bank policies and the supply of money will continue to provide a floor for the precious metal. Many analysts see economic conditions going through peaks and troughs over the next few years, with gold benefitting as investors are more inclined to invest in something real that is not artificially propped up by government stimulus.
Other banks such as Goldman Sachs have recently forecasted that gold will peak in 2013 at $1,825 an ounce. The investment bank went on to note that without additional easing by the Federal Reserve late next year, gold may fall to $1,625 by the end of 2014 and perhaps $1,500 in 2015. This forecast took much of the market by surprise this recently, as to predict where gold will be three years is considered by some as a bit presumptuous. That said, the condition of the global economy will predict what policy central banks around the world will need to implement, and at this time the economy is very much on support.
The increase in precious metal demand has led to a large misconception that gold and silver offer investors a safe haven from the volatility in the equity markets. The metals do offer some protection from the equity markets and the devaluation of a currency, but they do however experience quite a bit of day-to-day volatility. Gold, silver, platinum, and palladium continue to be the primary metals purchased, and they absolutely should be held by retail investors to diversify and protect their portfolio.
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