Where one should invest money in – gold, real estate or dollar

M. Ghaniashvili

Year 1979, one of the modern, famous American novelists John Apdic’s character is explaining to her wife why he paid $11 000 for 30 gold coins.

The answer is – “Gold is attracted by bad events and that’s why it is so majestic”. Three decades have passed since then and world economy is still full of “bad events”. In the desperate times caused by global economical crisis and recession, gold is again on the world arena.
During the current global crisis, everybody worries about self-survival and security of own capital. Where should one invest own money? Where should one invest own capital, in dollars, real estate or maybe in gold? Nowadays, everybody cares about these questions. Georgian Lari is slumping down and its exchange rate toward US dollar is falling. Real estate is already depreciating, we have never had stocks and bonds and there are many doubts about deposits in the banks too. The same situation can be seen in neighboring Armenia and Azerbaijan. Armenian Dram is devaluating and there are no investments. Consequently, nowadays in whole Caucasus the actual matter is not how to make money, but how to save it and naturally this problem comes from the west. The answer to this question for European and North American investors (and, not only for them) is – gold. Besides the fact that traditionally gold is precious metal and it never losses it value, gold successfully stands inflation. This is well known by the investors, consequently gold price and demand is colossally increasing on a world scale. Before Christmas, on the world exchanges, the price of ounce of gold was $800, while at the end of February its value increased up to $1000. The stock price of goldmining companies has doubled on AMEX (American Stock Exchange). World Gold Council in its review suggests that increasing demand on gold will be preserved for a long time and gold resources’ shortage in comparison with the existing demand is anticipated.
Increase in the price of gold begun in March 2008 and the value of gold on New-York stock exchange exceeded the bounds of $1000. From the beginning of 2009, the price of gold increased by 13 percent. The price of oil products has considerably decreased last year. Gold was the only commodity the price of which has increased. The maximal gold price was reached in March 2008, when the price of ounce was $1020. Economist analytics declare that gold remains beyond comparison investment that brings profit. In spite of this, during some period the price of gold was reducing either. Before it started to increase, the value of ounce slumped to $700 in 2007. However, in this case the price reduction of gold was caused by the slump of stock price on share markets, but not by the devaluation of the gold itself. As we already have mentioned, the picture is radically changing from spring 2008 and the demand on gold is increasing day after day. Popularity of gold is a reaction on modern global crisis and economical twists and turns. When in comparison with banking accounts, such savings as bank deposits are unsteady and less profitable many people prefer gold. It has power of attraction as an alternate way of saving riches. People consider gold as the mean of protection from inflation and weak dollar. Many investors say, “Gold is the thing what one buys when he has to lose something”. In the IV quarter of 2008, the volume of investments made in gold on ETS (Exchange Traded Fund) has increased by 18 percent in comparison with the previous year’s rate. ETS representatives say that similar tendency began in the third quarter of 2008. The price of gold is fluctuating between $900-1000 in the House either.
The director of MTB, one of the biggest dealers of gold, declared that demand on gold is three times more than they are able to supply. US Treasury has sold 193.500 ounces of gold in the first 7 months of this year that almost equals the overall rate of 2007 and the rate of first six months in 2008. The producer of world’s most popular golden coins South African Krugerrand – Rand Refinery representatives declare that in the February of this year the demand on golden coins was much higher than their productivity, despite the fact that the production of gold in a week was increased from 10,000 ounces to 20,000 ounces or it was doubled. The company representative declared, “If we could have produced 30,000 ounces a week the market would absorb it”. New Zealand’s Treasury representatives emphasize the increased demand on gold either. Treasury is gaining more profit in a day by selling the gold than it was receiving in a month during previous years.
As regards Georgian golden coins – the first investment golden coins with the image of “golden fleece” was coined in Austrian Treasury, in 2006, by the order of National Bank of Georgia. Six types of investment coins with different size and weight have been produced. The smallest one weighs 3.1 g, while the biggest weighs 311 g. Investment coins are offered for sale at the Money Museum of the National Bank of Georgia and at the regional branches of the National Bank on a daily basis. The National Bank of Georgia establishes the selling price of 1000, 300, 100, 50, 25 and 10 Lari denomination coins on a daily basis according to the prices established by the London Bullion Market Association.
According to the data of 6 March 2009, the value of investment coins is the following:
When reviewing statistical data more closely (http://www.nbg.gov.ge/index.php?m=409&p=1), one might observe that investment coin price is increasing gradually since the end of 2008.
It’s interesting how far the gold price can increase. There are various points of views in this direction. CitiGroup has published its forecast, according to which the price of ounce gold will reach $2000. On the contrary, company UBS experts reckon that price increase won’t last long and at the end of 2009, it will remain at the price of $855. However, speculators are supporting the idea that gold price will increase and at the end of the year and it even may reach $2,300 that will be similar to 1980 year’s peak, when the price of ounce gold was fluctuating between $2000-$2500. If we take into account that there is a colossal demand on gold in the market that cannot be balanced by the supply yet, and considering the fact that world economy is full of bad events nothing threatens to gold attractiveness. I suppose prices will increase again.
What’s going on in Georgia? Are the prices and demand increasing or decreasing on gold? In order to find out this we visited so called “Gold market”, where average price of one-gram Italian gold is 40 GEL, while Russian gold costs 37-38 GEL. As the gold traders say, after New Year the demand on gold decreased and accordingly the prices fell either. However, this was a temporary event and now the prices on gold have increased again. The traders also mention that during last few weeks selling rate has decreased significantly and “it seems that economical crisis has influenced the country and people”.
The jeweler’s shop network Zarafkhana is suffering lack of clients also. We contacted shop’s representative for the comment.
– “The shop values the jewelry not by the weight but by the design complicity, gold standard and technological process difficulty. Average price of No 585 gram gold article is 60 GEL. During world crisis and inflation, gold is becoming the most liquid asset and the best of money investment. It would be logical to suppose that the demand on gold would increase, however, unfortunately the selling rate growth tendency hasn’t been observed in our network of shops” – declared the marketing manager of Zarafkhana Misha Kurdadze.
LTD Kvarcit does not suffer with the shortage in clients and decrease in demand. Kvarcit is mining precious metals by recycling flint ore that comprises gold. Hundred percent of the product (ore comprising the gold) is exported in various international markets, including The LBMA (London Based Trade Association). The production capacity of Kvarcit is 1.700.000 tones of recycled ore a year. At present, in terms of increased demand on this product and implementation of new technologies, the production capacity has grown up to 3.200.000 tones a year.
If one trusts the data of Statistics Department of Georgia – in the current year rating for exported products the first place has taken semis and worked gold. In the January of 2009, 12.2 percent of export came on gold that is $7.6 million.
Does such popularity of gold have a positive influence on world economy development? The views of the experts toward this matter are split in two. Their part has negative attitude toward Gold boom and emphasizes that such increasing demand on gold and large investments of capital will have a negative effect on the long-term development of the economy. As the metal boulders cannot increase economical activities and cannot improve the level of living. Investors are busy with ensuring security of own capital. Nobody dares to think of risky ventures. Nobody is busy with making business without which it is impossible to create new working places, technologies and innovations. However, each investor or individual can invest the capital at its own discretion. However the part of the experts, which negatively evaluates gold popularity, hope that this tendency won’t last long and investors will direct their savings in a different direction that result economic growth and living standard improvement.
Of course, there is a suggestion of truth in what was stated. However, during global crisis and recession one cannot be condemned for worrying about own capital security. In the decision making process, the defending mechanism is more important than the future profit. Consequently – the answer to the question – dollar, real estate or gold – is logical. Before banking sphere and financial sector, together with construction industry recover and confidence in these fields will be reestablished, gold is the most reliable guarantee of capital saving.