The investments in gold take many forms so the answer to this questions isn’t straightforward. Years before when there was no major or any currency existed for circulation, gold was the only major currency known. It’s widely known that old habits die hardly and the precious yellow metal still is most popularly traded and most of the world’s population recognizes it to be the definitive currency.
Golds’ Price vs it’s Value
Price of gold is measurable and tangible in any currency that you choose and it is subject to the market forces. The value of gold is more abstract and it’s reflected in its compactness for those escaping financial risk. Whereas the negative or low relation of gold with other asset classes and its role as the inflation hedge proves it to be an important component of a portfolio when it increases a high incentive for same risk and vice versa.
This is one of the reasons that if an investor looks forward to extend the risk through his portfolio, they don’t care much for the price being paid because eventually the contrarian spirit would diminish the chances of risk for investors. Investors invest heavily in gold because of the price paid for its value; but when it comes to capital appreciation, this argument has an entirely different context.
Yellow Metal – A Hard Asset
Gold is considered as a hard asset by the investors for hedge to compete with price inflation. Gold bulls took advantage in the recent years by major central banks’ easy monetary policies, which are implemented to restore businesses and spending during the economic recessions. In = past years, interest in gold futures among the individual traders has increased evidently as the daily price instability in the yellow metal has increased.
Twenty years back the trading range weekly in the gold futures was under $10 when the cost of gold was valued at below $1000 for an ounce. But as of now, gold trading has increased to $1000 with the economic and political developments clattering the market. Now, sometimes, the weekly trading of gold is as high as $25 and more in a day.
Governments go back to gold
Gold is not a fiat currency; this fact has made governments declare a legal tender that is not sponsored by a physical commodity. It means that the banking system (specifically the official sector) will also benefit from this. The best example explaining this is the South Korean case in 1997, when the Asian financial crisis was faced.
The Thai Baht collapsed and the problem spread like an infection; the debt to GDP ratio was more than double and the level of currency was splitting. In this situation IMF stepped up for help, but on the other hand gold played a key role as well. Such situations have proved gold (or yellow metal) to be a safe haven for investors worldwide.
