After a screaming run in 2011, gold (NYSE:GLD) has hit a bit of a hitch this year. The yellow metal’s worth did finish the first quarter in the black, but it has been in steady decline since February. Still, many analysts think gold will climb from current valuations around $1,660 to $1,900 by year’s end, so there’s more than enough reason to get in.
Of course, you can’t just hop into gold all willy-nilly; you need to have a plan. So today, InvestorPlace is talking to Edmund C. Moy, a consultant with Morgan Gold and a former director of the U.S. Mint, to discuss a few things investors should know when dealing with gold. At the Mint, Moy was responsible for the production and distribution of about 10 billion to 20 billion coins annually, as well as maintaining physical custody and protection of the nation’s $100 billion in gold and silver assets.
OK, most people’s gold hoards likely will be a touch less than that. Still, having a well laid-out plan and knowing what to watch for is vital — regardless of the size of your investment. Moy sounds off on these topic, as well as a growing issue in the coin world.
Q: What economic issues should investors keep an eye on if they plan on jumping into (or are already invested in) gold?
A: The strongest influence on the price of gold is the value of the dollar. Generally, when the dollar falls, gold rises and vice-versa. That is why gold is a natural hedge against inflation.
Those who are interested in the potential rise in gold prices should look at the types of economic and political instability that will drive the dollar’s value down. So investors should look at governments’ fiscal and monetary policies, like the level of national debt and central bank balance sheet expansion.
On fiscal policy, will our economy grow more aggressively and therefore bring in more tax revenue to reduce the deficit? Will Congress and the president agree on a budget that reduces the deficit or even generates a surplus? If the answer is no, then gold prices will likely rise.
On monetary policy, if America cannot tame its record deficits and national debt or continue the economic recovery, will the Federal Reserve to engage in another round of quantitative easing? If the answer is yes, then gold prices will likely rise.
Other key areas to watch are the European debt crisis, escalating tensions in the Middle East and a slowdown in growth in India and China.
Q: One of the biggest stories in gold is China’s rampant demand — but something that seems overlooked in most headlines is that India is the top market. That looks poised to change soon, but how much attention should investors give one, the other or both of these countries?
A: Price is a function of supply and demand. The supply of gold is relatively fixed, with only relatively small amounts of new gold being mined every year. The demand for gold is relatively flexible and is significantly influenced by its desirability among investors as a hedge against inflation.
But there are other factors that influence the price of gold, like the industrial use, jewelry demand and individuals using gold as a storehouse of wealth. India and China’s robust economic growth has increased the demand for gold for industrial use in electronics, computers and industrial glass.
There is also a cultural affinity in both countries’ cultures for gold. As a result of a growing number of citizens becoming more prosperous, the demand for gold jewelry has risen dramatically because it is a personal status symbol. It is also very popular in both cultures to give gold as a gift, especially at weddings, graduations and holidays like Diwali or the Chinese New Year. And due to the checkered history of unstable currency and banking systems, many Indians and Chinese buy gold bullion, in coins and bars, as a storehouse of personal wealth.
So yes, investors who believe that demand influences the price of gold should definitely pay attention to India and China.