Gold markets have been one of the hottest and most talked-about markets for traders and investors around the globe in recent years. Not a day goes by without news of how the movement of gold prices are affected by the global economy, the financial markets as well as geo-political developments.
After the financial crisis in 2008, there has been a run up in gold prices- from US$800 per ounce in early 2009 to above US$1,900 in the autumn of 2011. At its peak, there were predictions that gold prices would go up to US$2,000, US$3,000 and even to US$5,000 per ounce. Prices have since moved downward and presently the price of gold is hovering around US$1,400. Nevertheless, every single occurrence within the global economy has a prevalent and pronounced effect on gold prices. This volatility creates a myriad of opportunities for astute investors and traders to boost returns on their investments.
There are a number of compelling reasons why investing in gold is a sound and profitable choice.
One of the most distinct features of gold is it has historically shown little to no correlation to major asset classes, including commodities. This independence stems from the fact that its price is not driven by the same factors that drive the performance of other asset classes. This makes it an attractive choice to be added into one’s portfolio since it will give investors diversification in their portfolio to reduce their investment risk. Studies have shown that even a small allocation of gold into their investment basket can significantly improve the consistency of portfolio performance. So, it is appealing to investors with varied degrees of risk tolerance and is thought to be the most compelling asset to be added into their portfolio.
Hedging against inflation and currency fluctuation
Today, in Malaysia as well as around the world, with wages flattening and interest rates low, investors are feeling the corrosive effects of inflation. Besides, as investors’ incomes lose their purchasing power, their savings diminish in value as well. Hence, investors who are in urgent need of an effective preserver of wealth and buying power, turn to gold due to its status as a premier store of wealth. The value of gold, in terms of the amount of real goods and services it can buy, has remained largely stable for decades, if not for centuries. It has endured sweeping changes, inflation and repeated geopolitical shocks. A growing body of research supports gold’s reputation as a protector of wealth against the ravages of inflation. Numerous economists have demonstrated that, over the long term, through both inflationary and deflationary periods, gold has consistently maintained its purchasing power.
Long term store of value
Gold has all the defining characteristics which allows it to function like money and most importantly, a reliable store of value over the long term. Among those characteristics are its scarcity, portability and wide acceptance as a form of payment. Throughout history, the markets have experienced different cycles- from economic turmoil to prosperity but gold endures. It is hence not surprising that central banks around the world hold a portion of their reserves in gold and coins it the ‘ultimate asset’. In the next segment we will explore the demand and supply of gold and provide an insight into the main buyers and suppliers of gold globally.