Is Gold a Golden Investment?
Gold was and still is one of the oldest traded assets. It is also known to be one of the most traded assets by governments and central banks, as it is known to have never lost its value. Economists believe there will always be a demand for the precious metal, it was and most likely will always be known as a precious metal.
Previously, Gold was used as a standard for monetary exchange as well. This practice was stopped with the introduction of the fiat system in the US in 1971. In fact, Switzerland was the last country to support their money with gold. This is why some traders believe the Swiss Franc is slightly related to Gold, due to the high level of gold reserve the Swiss National Bank holds.
In today’s market, thanks to technology and the internet, not only the upper class is able to invest in the market’s “safe haven” asset. Trading platforms and leverage have enabled the everyday trader to also have the option to speculate Gold’s price movement.
What do I mean by Safe Haven?
A safe haven is an asset that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns.
However, what appears to be a safe haven in one down market could be not-so-useful in another type of down market, and so the evaluation of Gold is necessary and traders shouldn’t instantly believe prices would rise due to a recession or crisis.
For example, during today’s Coronavirus crisis there were times when analysts feared Gold prices would not rise as many institutions and individuals required their capital to be more liquid.
Is Gold Really a Safe Haven and if so, then why?
For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money, and its value is not impacted by interest rate decisions made by a government. Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events.
When an adverse event occurs that lingers for a while, investors tend to invest a lot of their portfolio in Gold, which drives up its price due to increased demand. Also, when there is a threat of inflation, the value of gold increases since it is priced in U.S. dollars. Like other commodities, Gold is known to be negatively correlated with stocks and bonds and serve as safe havens for investors in times of crisis, recession, conflict and stock market crashes.
But what about Gold Today?
Gold prices over the past 2 weeks have increased from $1,592 to today’s price of $1,716. A price that movement analysts have long predicted over the past 4 months but had not become reality until now. At times, Gold seemed to struggle possibly due to a strong US Dollar and/or due to traders looking to keep capital in more liquid forms.
The precious metal’s market is growing moderately today. The price may drop to the current $1,680 per ounce mainly due to the lack of cash liquidity.
The Oil market also began to fall significantly, and yesterday, the position of buyers lost more than 50%. In an attempt to maintain their unprofitable position, investors began to fix profits in gold and buy cheaper oil, which led to Gold’s weakening.
The US’ attempts to stabilize the situation in the markets continue, and debt rates suffer due to investors’ mistrust. The rate on the 3-month treasury bonds fell to 0.125% from 0.280%, whereas 6-month bonds were placed at 0.145% instead of 0.290%, and 52-week bonds were at –0.165% instead of 0.260%.
Along with the bond market, traders should also keep an eye on the stock market. Currently, the stock market continues to struggle, and both the Dow Jones and S&P 500 have been depreciating since Friday. If the stock market continues to fail in finding support, this could lead to the further purchase of Gold. However, if the stock market stabilises, this may cause further strain as it has in Oil prices.
Overall, Gold does hold the volatility which certain traders may be looking for. However, traders should not simply believe Gold will rise due to a crisis and must analyse it carefully, to ensure they are trading responsibly and with the best chances of success.