Five Reasons Why Gold is Still a Superior Investment
Commodities / Gold & Silver 2019 Nov 09, 2019 - 06:19 PM GMTBy: Submissions
Gold has been the most popular form of investment and one of the most reliable assets recognized for its multiple use and rare value. Following the recent introduction of other investment substitutes, a number of people are made to believe that gold is less superior than the others. This article will highlight five reasons why gold has not lost its value, but still thrives as an investible
A perfect Asset for Portfolio Diversification
Portfolio diversification is a very important risk management strategy in the world of investment that makes use of mixing multiple digital assets in a portfolio. The rationale behind this strategy is to have an asset standing when most of the investments in the portfolio are falling. It is worth noting that the best way to diversify a portfolio is to have assets that do not correlate with each other. In other words, one or two of the invested assets must not be dragged by the price movement of the others, and this is where gold comes in. When it comes to correlation with other major assets, gold has a zero to negative correlation. In other words, it has no significant correlation with most of the major assets, making it a perfect portfolio diversifier. It has also been reported that gold is not usually affected by the macroeconomic and microeconomic factors that affect the prices and returns of investible assets, and this makes it a good fit for risk management decisions.
Hedge against Inflation
The superiority of gold as an investible asset has been evident in its hedge against inflation. According to reports, the price of gold usually rises when all other stocks fall in the midst of general increase in price of goods and services leading to high cost of living. In the last 50 years, the price of gold has always risen when stocks fall in period of high inflation. The reason is linked to the fact that gold is mostly priced in currencies that undergoes high rate of inflation, leading to the rise in price of gold. Similarly, the price of gold tends to soar during a period of deflation that comes from economic recession. When fiat currencies depreciate in value, the gold price soar as the price of all other stocks fall. This is mostly because people convert currencies into gold to avoid being affected by the depreciation. The price of gold stands tall during the period of market recession and market boom, making it a superior investible asset to the rest. Gold has over the years been a good object for store of value. The stability of its price reduces the risk of losing the value of a converted physical asset to inflation.
Potential Price Increase Due to Supply
The supply of gold has declined over the years as the production of gold from mines has not been much effective since 2000. Most of the golds we find in the market are from bullions issued from the vault of global central banks. This makes it a perfect asset for investment as they have the potential to stage a bull run. In economics, when the supply of an asset falls, the price increases. This coupled with the high demand of the metal for its valuable use causes the price to spike.
Incredible Liquidation
Investing in gold does not only provide a safe havens for the investment of individuals, and provide risk management strategy through portfolio diversification. It also has an incredible pace of liquidation compared to other investible assets like the real estates. Unlike most of the investible assets, gold has no lock-in period. The redemption amount of physical gold is mostly determined by factors such as the market price and the purity of the gold. The redemption amount of paper gold depends largely on the market price on the redemption date.
It Has the Ability to thrive in unfavorable geopolitical environments.
One main thing that makes investment in stocks, cryptocurrencies and others dangerous is the quick response to unfavorable government and political uncertainties. Most of the popular stock prices are bound to fall considerably at the announcement of an impending war. Surprisingly, gold thrives and soar even higher during period of political uncertainties. Prathamesh Mallya, a Chief analyst, and expert in commodities and currencies wrote that the gold price had been hovering between $1300 and $1350 in 2018 despite the geopolitical situations that hampered the performance of investible assets. Statistically, gold has a perfect correlation with political uncertainties and tensions between economic superpower countries. In the face of war, investors mostly raise concerns about the state of the traditional assets, and switch to gold which has been said to be a safe haven. This, in the long run, plays a huge role in driving the price to the moon.
It was even reported that the current tension between the U.S. and Iran which has raised fear of a possible war can drive the price of gold higher. Among all the known investible assets, gold would always remain superior because its demand goes beyond investment purposes. It is usually demanded for its intrinsic value and the multi-purpose it serves. The price of gold is sometimes driven by the currency market since it is denominated in the U.S. dollar. As an asset that thrives when all other assets falls, and as an asset that has real value outside its investment purposes, gold still stands as superior in the world of investment.
By Michael Kuchar
© 2019 Michael Kuchar - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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