(Traders shout out their orders at the Hong Kong Financial Exchange. File photo from Agence Franc-Presse)
There’s a never-ending oscillation between fear and greed in financial markets, and these days, if you believe the commodities markets, people are very, very scared.
Faced with the
plummeting dollar and
skyrocketing oil prices,
investors are scrambling for safe havens, which include gold and precious metals.
GoldMoney.com founder James Turk, was quoted by
Bloomberg as saying:
Gold is not only an inflation hedge, it's a catastrophe hedge. Gold is becoming increasingly important as the credit crunch continues to spiral out of control.
When there’s uncertainty, people like to have something they can touch, see and hold. Back when paper money was still a new concept, people stacked up on physical gold bars whenever there were uncertainties in the horizon.
In this day and age of investment sophistication, people still run to gold when they feel things go bump in the middle of economic nightmares, but they now do this in various ways -- buying gold jewelry, gold bouillon, gold mutual funds, gold exchange traded funds, mining companies that produce gold, gold coins or gold futures. As with any type of investment, each option has advantages and disadvantages, says
Investopedia.com.
Buying gold jewelry, bouillon and gold coins are perhaps more easily understandable than the other options in the pack. Gold mutual funds and gold exchange traded funds are not available in the Philippines and we don’t have a commodities exchange in the country that will allow Filipino investors to ride the boom in commodities.
That leaves the
stock market as the only exchange where Filipinos can get a slice of the action in gold, as well as the rising price of oil. When investors want to profit from the commodities boom, the most logical way to do it locally would be to buy shares of stocks in companies that produce gold and other precious metals, or produce and sell oil.
It sounds simple, but there are many ingredients in this plan. Investors need to choose a well-managed and well-positioned company that’s not overpriced (read: cheap). Aside from that, and perhaps more importantly, would be to analyze the overall market sentiment.
Case in point: Philex Mining Corp., one of the most profitable gold mining companies in the country. Despite the skyrocketing price of gold, it ended Friday at P7 from more than P9 in end-February.
“Investors locally can take a position in gold or oil by buying locally listed stocks that deals with gold or oil, but an added consideration will be the overall stock market sentiment,” said
Alijeffty Gonzales, president of ACG Advisors and Management Limited Co.
Jeff also raises the question of why gold prices are now at high levels to determine whether this kind of investment has legs. If the spike is because of the dropping dollar and inflation, which is the consensus, he says a reversal is likely when the dollar strengthens.
Meanwhile, big-time investors continue to ride the boom in commodities by trading in futures exchanges overseas like the Singapore International Monetary Exchange (SIMEX) for oil and the Hong Kong Financial Exchange for gold. For a full list of exchanges, click
here.
Let me stress the phrase “big-time.” Jeff says using leverage in trading tremendously magnifies both the profit AND losses that can be made. Besides, minimum investments are in the thousands of dollars, fees are steep, demand on time is huge and investors who play this game should be highly liquid to maximize price movements.
“
I used to trade these things and out of 10 people, nine lost money,” Jeff said.
But if the losses could be scary, the gains could also be fantastic. Jeff tells of a client who had a buy order for gold when it was still at $800 per ounce. Imagine his profit at current levels.
“
We don’t have capital controls now so anybody with money can open a private account in Hong Kong or Singapore, and these accounts can give them access to markets all over the world,” Jeff said.
Some retail brokers in Singapore for example may entertain investments of around $10,000 to $15,000. Fees will depend on the volume of trade, ranging from one-fourth of one percent or 25 basis points (traders call them bips) to 2.0 percent.
“
Some people here are already doing that. It’s costly to set up, though” he said.
If you want to study futures, be careful which websites you read. There are a lot of forex, gold and other trading scams out there. Start with
Investopedia.com, Commodity News Center’s
Introduction to Futures Trading, and articles on the industry regulator’s website, the National Futures Association, which can be found
here.
Clearly, trading gold and oil in futures exchanges is not for everyone. For a country with huge mining potentials, though, it can illustrate how cogs on the wheels of financial markets work, and why the “haves” are richer than the rest of us.
As for me, I’m happy with my few pieces of gold jewelry, content that I know some things about futures, and consider my little family all the gold that I need in this world. :-) Happy weekend!