Investment Keys for Taking Advantage of the Gold Rush

Gold is an asset that shines with its own light in times of crisis. Traditionally considered a safe haven of value, its demand has experienced strong growth in the last few months, and forecasts point to a continued increase. The options are buying physical gold or investing in futures.

The worldwide demand for the precious metal in the third quarter has experienced a strong increase of close to 50%, from 760 tons to 1,133 tons, according to the Gold World Council. At the same time, the precious metal futures in November have registered their greatest monthly increase since 1999, as reflected in a recent report by the specialized firm Capital Asset Management. As explained to Finanzas.com by Jaime Banchs, an analyst for the firm, gold futures in December entered a free rise and could reach 900 or 1,000 dollars per ounce in the first quarter of 2009, since international demand will be much higher than in other years, especially in December and January.

There are various reasons behind this idea, indicates the expert, but the one that stands out is the strong prediction of demand in India, the largest consumer of gold in the world. In fact, between December and January the demand for gold among the nearly 1 billion inhabitants of this Asian country will increase sharply due to two factors coinciding: the massive number of marriage celebrations and the religious festivals of "Diwalli", events in which it is traditional to give large quantities of gold as a gift.

In addition to the fact that the Eastern world tends to give large quantities of gold at Christmas, the same thing happens with the Chinese New Year, so that practically all peaks in demand are concentrated in the next three months. The problem is that the supply cannot be increased, being limited by extraction, so inevitably, gold will tend to increase in price, concludes the expert.

The bullish cycles of gold, explains Jaime Banchs, tend to last fifteen years, and now we are in the middle of one that started in the year 2000, which leaves a large margin for increase. Inferring from the behaviour of gold in the previous bull cycle of the 1980s, Capital Asset Management calculates that the levels gold reached then, adjusted for inflation, would equate today to 2,000 dollars per ounce. The technical analysts at Citi came to the same conclusion, calculating these prices within the next two years.

Buy physical gold or invest in gold?

The prospects are good, according to the experts, although the investor is faced with the dilemma of buying gold and physically storing the metal bars or investing in gold. According to Marta Dominguez, director of Oro Direct, one of the principal companies in Spain dedicated to the purchase and sale of physical gold, the primary advantage of accumulating physical gold is that this precious metal "is an internationally recognized asset that can be taken with you and does not depend on any promise to pay".

In her opinion, gold is no longer an elitist investment and you may enter with a minimum of 5,000 euros. The client may keep the metal bars at home, or rent a safe, in which case, explains Dominguez, the recommendation would be to invest a minimum of 50,000 euros. The average investment of her clients is between 20,000 and 30,000 euros, and the purchase is exempt from VAT. Clearly, states Dominguez, "it is a good long-term investment, which interests people more and more due to its ease and simplicity".

The alternative option to buying physical gold is investing in gold, the activity of Capital Asset Management. As Jaime Banchs explains, the purchase of physical gold and the shipping to the client in the end "is very expensive", first because the seller applies a high mark up. Also, the problem arises when you want to sell the precious metal because the gold is outside the professional circle after a given time.

To reintroduce it, it has to pass the verification of purity, which could mean a cost of up to 20%. Capital Asset Management buys the gold for the client - applying a commission of 2% - and stores it until you want to sell, without taking it out of the circle. "There is total security", explains Banchs, since the company is obligated by law to buy the physical gold. The difference is that the asset has immediate liquidity, it behaves like an investment product in the strictest sense, and does not carry sale or storage commissions.