Gold Investments in 2012

Investing in physical gold has been an excellent choice in the first decade of the 21st century. No matter in which currency you were holding (physical) gold, the value of gold rose four to five times. And the fundamentals are so strong that the gold outlook in 2012 has never been better.

In fact, experts in the gold industry point to gold as being more than an investment: it’s a (alternative) currency and a means to preserve your wealth. That statement is particularly true going forward in 2012, where currencies are debased all over the world. Holding money becomes less attractive.

What is the Gold Outlook in 2012?

The World Gold Council published in mid April their quarterly research about the gold investments during Q1 of 2012. Although the study only reports facts & figures about investments during the first quarter, it describes a trend for the gold outlook in 2012.  Three major conclusions came out of the report, as summarized below.

1. The gold price has risen in all major currencies. The long term positive evolution of the gold price is still intact. Gold in US dollars has risen 8.6% in Q1. That’s an increase of 22% year-on-year. We saw a very similar trend in the gold price in other major currencies, like the euro or the yuan.

We cite from the research from the World Gold Council: “Gold is best understood more broadly as a currency hedge. The relationship between gold and the US dollar is less stable when both benefit from investors looking to preserve capital as seen in 2008, 2009 and 2010. In addition, the growing importance of other currencies for gold such as the Indian rupee, Chinese yuan and Russian rouble has increased the significance of gold as a global currency hedge.”

2. The gold price showed an elevated but positive (upside) volatility compared to previous quarters. It means in plain English that there were in total fewer losses and more gains in the price of gold. When you compare investing in gold to investing in equities or other commodities, you would have a better return by making a gold investment in 2012. Clearly, this promotes gold’s role in a portfolio.

3. The performance of the gold price is independent of the performance of risk assets like equities. It means that the factors that drive the gold price were not the same as the ones that drove the stock markets. So there are times when the same factors drive the prices of gold, the US dollar, and stock markets, but there are even more times when those factors do influence each asset in another way. On a longer term basis however (longer than only one quarter), the gold price has a negative relationship with the US dollar and it appears to be stronger than any relationship with equity markets.

Gold and silver stocks as an investment in 2012

Buying physical gold is just one way to invest in gold. Buying gold and silver stocks is another one. The outlook for gold investments in 2012 is very positive for two reasons:

  1. The current prices of gold shares are extremely low, when compared to their real value. Historically, when the psychology is at extreme levels, it always marks a turnaround that is imminent.
  2. There is one ratio you need to follow closely: the gold & silver stock index price divided by the gold price. It indicates the relative performance of the gold & silver stocks compared to the physical (bullion) market. Compared to the price of gold, the gold stocks are at suppressed levels now. Looking at the gold bullion market however, we have a bull market going on for 12 years now. Yes there have been some major rallies in the mining shares, but there is a clear undervaluation on a relative basis.

One respected person in the gold industry is James Turk. He made this statement recently: the mining shares will be trading like internet stocks. Quality gold shares will be the Apple Computers of tomorrow. That’s what we believe as well.