Gold investing had been all the rage from 2008 into 2010 when fears of an economic collapse and impending hyperinflation captured the imagination of Americans.  More recently though, gold had lost some of its luster, dipping back below the $1200 per ounce level and staying there for some time and the conversation switched from hyperinflation to a new era of deflation in the US.  However, this prior week has seen a new gold rally, sending the spot price back over $1200 per ounce again, close to all-time highs.

What Makes Gold Prices Move?

Aside from the conventional supply-demand equation that most normal commodities, goods and services follow in the real world, gold and other precious metals like silver and platinum, tend to live in a world of their own.  The reason these metals tend to spike during a period of hyperinflation (let me rephrase that, “anticipation” of hyperinflation in the future since it has simply not arrived) is that currency is devalued and the only things of value are true hard assets like real estate and precious metals.  Now, during deflation, currency actually gains in value since you’re dealing with “negative” inflation.  So, if you have a dollar under your mattress today, it’s worth say, $1.05 next year.  It’s hard to contemplate since we’ve lived in a world of moderate inflation for so long, but deflation has taken hold in Japan for over a decade now and people end up doing better off just holding cash instead of buying things, which propagates the viscous cycle.

Now, aside from perhaps some additional gold purchases in the form of jewelry and minor industrial use increases over the years adding to the demand part of the equation, the belief is that the massive runup in the price of gold we’ve seen has been due to fears of hyperinflation.  More recently, it didn’t hurt that major hedge fund investors like George Soros were reported to have added to their gold positions either.  But does this make sense for you as a routine retail investor/saver?  If you think so, start off by learning about the different vehicles for investment.

How to Invest in Gold:

• Gold Mining Stocks – There are many large publicly traded gold mining companies like Barrick Gold that derive the majority of their revenues from mining operations and shares tend to rise when the spot price for gold rises since they are selling the commodity directly.

• ETFs - There’s an ETF for straight gold bullion (GLD) as well as an ETF comprised of multiple gold companies (GDX).  The nice part about ETFs is that they trade like stocks but remove the operational risk of owning one individual company.  Just be mindful of the tax implications of each.

• Gold Bullion – While many late night TV spots tout the safety and security of owning your own gold, there are costs associated with these purchases to consider which include holding costs and the initial markup you’re likely to pay the middleman.

Typically, many financial advisers advise holding say, 2-5% of net holdings in gold and precious metals but some feel it’s not worthwhile holding any gold at all, since over the long term, gold pretty much performs in line with inflation, especially when you account for transaction fees and holding costs.  Much depends on whether you truly feel we’re heading for a cataclysmic inflationary environment.  And if you fear deflation, it’s probably best to avoid gold altogether.