Should You Buy Gold Bars? A Better Way to Invest in Gold Bullion—Without Owning It
Gold bullion has gained a lot of attention these days. The prices have soared significantly, and the yellow shiny metal continues to holds its ground. Since 2002, gold bullion prices have increased from trading just above $300.00 an ounce to now hovering around $1,700—that’s an increase of more than 460%. Just look at the chart below.
Chart courtesy of www.StockCharts.com
One basic rule of economics: when the demand goes up, the prices go up. Gold prices are following this principal, and it’s that simple.
Currently, the central banks in the global economy are rushing to buy gold bullion. Why, you may ask? To say the least, gold bullion holds have been known to store value when the currency declines.
The major central banks around the world are busy printing money because their exports are getting hurt. When they print more currency, the currency declines—this way, their goods become cheaper, more competitive in the global economy.
Who’s Involved in Printing?
The list of central banks working to devalue their currencies is getting longer these days. To give you some idea, Brazil, Switzerland, Russia, South Korea, Peru, Colombia, and Costa Rica are all involved in the printing of their own currencies.
In addition to these central banks, the Bank of Japan and the U.S. Federal Reserve have also become notorious for their printing activities. The central bank of Japan has outright announced that it wants to devalue the yen due to its exports falling significantly.
The Federal Reserve has printed trillions of dollars in order to boost economic growth in the United States, but it has yet to see the results it wants to see. It is currently in its third round of quantitative easing—printing $85 billion a month with no end date.
In their reserves, central banks around the world hold currencies—major currencies, mainly U.S. dollars. Now, imagine what happens if the values of those currencies in their reserves go down? They will have to either sell those currencies, or buy something they know can hold value to protect their reserves from declining significantly.
This is where gold comes in. As mentioned earlier, gold stores value as currency declines. Central banks need gold to diversify their reserves, because major currencies are falling in value.
We are already witnessing their demand increase significantly. Central banks used to be the net sellers of gold bullion, but they have turned into major buyers since 2009. As the list of central banks printing money grew in numbers, the list of gold buyers became much longer as well. For example, central banks from Russia, Brazil, South Korea, the Ukraine, Turkey, and Kazakhstan are all involved in buying gold bullion—at an accelerated pace.
As gold prices rise, investors might want to ponder the gold miners. These stocks will be able to profit the most from all this printing. This is mainly because gold miners can take out gold from the ground for fairly cheap, and sell it for the current price, for a large profit.
Consider Goldcorp Inc (NYSE/GG), for example. In the third quarter of 2012, ended September 30, the company produced 592,500 ounces of gold at a cash cost of $220.00 per ounce (Source: “Third Quarter Report,” Goldcorp Inc. web site, last accessed February 11, 2013.)
So, if the price of gold bullion is $1,700 per ounce, Goldcorp can make a profit of $1,480 per ounce. Now, compare this to buying gold bars. Say the buying price is $1,700; if the price reaches $2,000, the profit will only be $300.00—much lower.
Look at gold miners as an alternative to buying gold bars. It’s true that when you purchase a gold bar, you have it right in front of you, but your profits will be much lower. Gold miners can make you a much higher return if gold bullion prices skyrocket.
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