Why are gold prices so volatile?

There are a million golden theories to address the rise and fall in the market price of the precious metal. Most relate to supply and demand. When prices rise, some analysts point to heavy buying from central banks or hedge fund managers or investors wanting to diversify their investments away from perceived weak currencies.

The growing middle class in India and China has been mentioned as one reason why demand for gold has been growing; jewelry is, after all, the biggest use for gold.

Traditionally, weakness in the exchange value of the U.S. dollar has also been bullish for gold prices and the dollar weakened dramatically against a wide basket of currencies throughout 2007, reaching an all-time low against the euro and a 31-year low against the Canadian loonie.

When prices fall dramatically, analysts look for signs that central banks are selling off their gold reserves. Many countries have been doing that. The Bank of Canada, for example, has sold most of its gold reserves and held just $78 million US worth as of September 2007. But recently, the wider demand for gold has offset central bank selling as the weak U.S. currency had investors rushing into gold.

Gold has long been a traditional hedge against inflation and demand for gold tends to pick up when inflation does.

And some price movements may simply be due to speculation from short-term traders who notice big price swings in either direction and want to join what they see as a bandwagon.

Investors are left wondering whether the next climb or plunge is just around the corner, followed by years of stagnant returns.

Should I buy gold and if so, how can I get some?

Financial planners generally advise their clients who want a stake in gold to keep their precious metals holdings to a small part of their overall portfolio – at most five or 10 per cent.

There are many ways to acquire gold. You can buy gold coins, gold wafers or bars, or gold certificates.

• Gold Coins: A number of countries mint gold coins. Britain has been producing sovereigns for centuries. Austria, China, the U.S. and Mexico also produce gold coins. South Africa has produced its Krugerrand coins since 1967. Canada joined the gold rush in 1979 with its Maple Leaf gold coin. At .9999, it’s the purest gold coin in the world. It’s available in six denominations from 1/20th of an ounce up to one ounce. There is a small premium charged on the gold value of the coins. Maple Leaf coins are available from the Royal Canadian Mint, some coin dealers and some banks. Be aware that some Canadian gold coins are aimed at collectors and sell for considerably more than their gold value. So if you just want a coin for the gold content alone, buy Gold Maple Leaf coins. No GST is charged on gold coins if they are refined to a purity of at least 99.50 per cent. But some provinces charge sales tax on gold coin sales.
• Gold wafers and bars: There’s nothing quite like the sensation of tossing around a 400-ounce gold bar. Banks can sell you bars and wafers ranging from 1 ounce to 400 ounces for a small premium over the spot gold price. Most financial institutions will also rent safety deposit boxes to store your golden haul.
• Gold certificates: You can also own gold in certificate form. Most banks can issue paper certificates that are backed by the bank’s assets. There are no fabrication, shipping or insurance costs and no sales tax to pay. They can be sold easily or exchanged for physical bullion. They are made out of paper.

You can also invest in companies that mine gold. There are dozens of gold companies listed on the Toronto Stock Exchange. Some of the biggest Canadian companies for example are Barrick Gold, Kinross and Goldcorp. International gold mining giants include Newmont Mining, AngloGold Ashanti and Gold Fields Ltd.

There are dozens of precious metals mutual funds that will give investors a stake in a variety of companies that mine gold and other precious metals.