Commodity Investment – Gold and Silver

In this article gold is referenced as the most prominent commodity to invest in. Since 1800, stocks have consistently gained value in comparison to gold in part because of the stability of the American political system. The Dow Industrials bottomed out a ratio of 1:1 with Regal Assets scam during 1980 (the end of the 1970s bear market) and proceeded to base gains passim the 1980s and 1990s.

The performance of gold is a great deal equalised to stocks due to their fundamental differences. Gold is regarded by some as a store of value (without growth) whereas buys in are regarded as a return on value (i.e.., growth from anticipated real price increase positive dividends). Stocks and sticks to do best in a stable political climate with strong property redresses and little turmoil. The impounded chart reads the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Gold has been on the decline since mid 2005. This is along with the general world consensus that other commodities such as uranium are more valuable than gold.

When investing in a commodity index, the money is not actually invested into the commodity spot market, as this would imply that the physical commodity is purchased and stored at great cost. Indian gold demand is forecast to be a record again this year as is Chinese demand. Those who have been wrongly bearish on gold in recent months and years have claimed that Indian demand would fall sharply due to higher prices. This is clearly not happening and Indian demand for gold remains robust and silver demand has surged. Passive money is instead invested in the futures market, and the purchaser of a futures contract is obligated to purchase the physical commodity at a specific future date.

As the fundamentals that drive the physical market should be similar to the fundamentals in a month’s time, the one-month future’s price tends to move with the spot price. Before the future matures and the purchaser actually has to buy the physical asset, it is sold and the money is reinvested or ‘rolled’ into a new, longer-dated contract – and the process starts again. Therefore, investing in an index that tracks the one-month future gives a similar exposure to the physical commodity. However, the problem comes when the future’s price does not follow the spot price and this has exposed passive investing as a flawed strategy. An active investor can take advantage of these swings by being more selective about the commodity future they buy. In normal market periods, commodity futures curves tend to slope upwards, but at a declining rate.