Disclaimer on the price of goldAlthough Dr. Planchet provides analysis about gold, he does not know whether the price of gold will go up or down. Investors should do their own due dilligence before investing in gold or anything else.
Gold as a hedge against inflation
Many people are remarking how gold has gone up in value. Rubbish. In reality, the dollar is going down in value. If we compare dollars to Euros or bushels of corn or wheat or silver or gold, we find that the dollar does not go as far as it used to.
Since the inflation rate is genrelly above zero, the dollar will always decline in value. When the Fed lowers interest rates, people earn less on their dollars, and will tend to spend them rather than save them. This leads to further inflation. And so the recent Fed moves along with the economic stimulus package are likely to increase inflation.
When people shun the dollar, they need somewhere to put the money. Gold has been one of the classic hedges againt a weak dollar. With dollars, the supply is unlimited -- the government can print as many new ones as it desires. With gold, the supply is extremely limited. With the failure of alchemy in the 1600's, we only have as much gold as is in the ground now. We can make no more.
Investing in gold bullion coins
There are several ways of investing in gold. One is to buy gold bullion itself and store it (either in a safe deposit box or carefully hidden in your home). The US government produces several gold bullion coins. The "American Eagles" contain the standard mix of 90% gold blended with copper. They come in denominations of 1 oz, 1/2 oz, 1/4 oz. and 1/10 oz. The US also produces the American buffalo gold coin, which is pure gold and comes in one ounce denominations. These coins gerenally come at a small premium over the spot price of gold,due to some collector value.
Foreign gold bullion coins
Competing with the US gold coins are bullion coins from other countries. These include the Chinese Panda,the Australlian Kangaroo,the Canadian Maple Leafand the South African Krugerrand,
Another way to own gold is to buy historic gold coins that have value as collectibles in addition to the melt value of the gold. The best US collectible in this category is the twenty dollar St. Gaudens gold coin. Some foreign collectables include Mexico's fifty peso coin, containing a whopping 1.2057 ounces of gold.
Instead of owning and storing the gold, it is possible to buy gold funds. One example is the Power Shares Deutsche Bank gold fund (DGL). The fund is based on futures contracts on gold and is intended to reflect the performance of gold.
But gold pays no interest
If you keep your money in the bank, you earn interest (wlthough these days, its precious little). One complaint about owning gold is that it pays no interest. However,it is possible to get a dividend-like payment out of your gold. The basic method is to purchase the gold funds, such as DGL. Then sell an option on the gold. For example, if DGL sells for $34 per share, sell an option for someone else to buy your shares at, say, $36 per share. Ideally, you want the option to expire as soon as possible (no longer than month). At the end of the month, if DGL closes below $36, the option expires worthless, and you pokcet the profit. If DGL ends up above $36, the option can be exercised. That means someone else will buy your gold for $36. You still make $2 per share profit, plus you keep the premium for the option you sold. Happiness prevails. Then buy more shares and do it again.
Gold mining stocks
Another method is to buy stocks (or options) in gold mining compaies. As the price of gold rises ,these stocks are likely to rise too. However, one should exercise caution here, since this is not a pure play on gold. Any problems with a mine could easily eliminate the potential profit from the rise in price of the gold.