Five Reasons Why Gold is Still a Superior Investment / Commodities / Gold & Silver 2019
Gold has been the most popular form of investment and one of themost reliable assets recognized for its multiple use and rare value. Followingthe recent introduction of other investment substitutes, a number of people aremade to believe that gold is less superior than the others. This article willhighlight five reasons why gold has not lost its value, but still thrives as aninvestible
A perfect Asset for Portfolio Diversification
Portfolio diversification is a very important risk managementstrategy in the world of investment that makes use of mixing multiple digitalassets in a portfolio. The rationale behind this strategy is to have an assetstanding when most of the investments in the portfolio are falling. It is worthnoting that the best way to diversify a portfolio is to have assets that do notcorrelate with each other. In other words, one or two of the invested assetsmust not be dragged by the price movement of the others, and this is where goldcomes in. When it comes to correlation with other major assets, gold has a zeroto negative correlation. In other words, it has no significant correlation withmost of the major assets, making it a perfect portfolio diversifier. It hasalso been reported that gold is not usually affected by the macroeconomic and microeconomicfactors that affect the prices and returns of investible assets, and this makesit a good fit for risk management decisions.
Hedge against Inflation
The superiority of gold as an investible asset has been evidentin its hedge against inflation. According to reports, the price of gold usuallyrises when all other stocks fall in the midst of general increase in price ofgoods and services leading to high cost of living. In the last 50 years, theprice 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 thatundergoes high rate of inflation, leading to the rise in price of gold.Similarly, the price of gold tends to soar during a period ofdeflation that comes from economic recession. When fiat currenciesdepreciate 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 beingaffected by the depreciation. The price of gold stands tall during the periodof market recession and market boom, making it a superior investible asset tothe rest. Gold has over the years been a good object for store of value. Thestability of its price reduces the risk of losing the value of a convertedphysical asset to inflation.
Potential Price Increase Due to Supply
The supply of gold has declined over the years as the productionof gold from mines has not been much effective since 2000. Most of the golds wefind in the market are from bullions issued from the vault of global centralbanks. This makes it a perfect asset for investment as they have the potentialto stage a bull run. In economics, when the supply of an asset falls, the priceincreases. This coupled with the high demand of the metal for its valuable usecauses 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 alsohas an incredible pace of liquidation compared to other investible assets like thereal 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 asthe market price and the purity of the gold. The redemption amount of papergold 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, cryptocurrenciesand others dangerous is the quick response to unfavorable government andpolitical uncertainties. Most of the popular stock prices are bound to fallconsiderably at the announcement of an impending war. Surprisingly, gold thrivesand soar even higher during period of political uncertainties. PrathameshMallya, a Chief analyst, and expert in commodities and currencies wrote that thegold price had been hovering between $1300 and $1350 in 2018 despite thegeopolitical situations that hampered the performance of investible assets. Statistically,gold has a perfect correlation with political uncertainties and tensionsbetween economic superpower countries. In the face of war, investors mostly raiseconcerns about the state of the traditional assets, and switch to gold whichhas been said to be a safe haven. This, in the long run, plays a huge role indriving the price to the moon.
It was even reported that the current tension between theU.S. and Iran which has raised fear of a possible war candrive the price of gold higher. Among all the known investible assets, goldwould 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 isdenominated 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 stillstands 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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