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Time to buy gold?

June 8, 2009 – 12:20 pm

Is gold right for your portfolio? Many speculators have been purchasing the metal in hopes of new all-time highs. Precious metals such as gold have had a nice increase in price over the past couple months.

Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand. This is because new supply from the mines is small compared to the above-ground, hoarded gold. When gold hoarders feel like selling, the price drops. When they want to buy, new supply is quickly absorbed and the gold prices are driven higher.

Demand for gold is affected by three major forces:

Systemic Financial Concerns- when banks and money are perceived as unstable and/or political stability is questionable gold has often been sought as a safe store of value.

Inflation- When real rates of return in the equity, bond or real estate markets are negative people regularly flock to gold as an asset that will maintain its value.

War or Political Crises- War and political upheaval have always sent people into hoarding gold. An entire lifetime’s worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter or safe passage to a less dangerous destination.

Is it the right time to be purchasing gold? That question is up to you and your investment time horizon for holding gold. There is a good chance of increased inflation, which would be beneficial for gold prices. However, nobody knows when inflation will work its way into the market. It could be this year or in three years.

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