It is often heard that gold functions as a hedge against inflation or that gold prices are correlated to the US dollar. These assertions do not reveal the total behavior or understanding of most Americans who view gold in a broader perspective in the US economy such as the global stock market, the nation’s inflation or even the GDP of US.
Gold is as important to an individual as to the US portfolio as the demand for this shiny metal was only 11% in the US between 2004 and 2008 whereas the remaining 89% demand was not accounted for to appreciate the metal’s true worth.
There is a clear global demand for gold in different forms; jewelry made up 68% demand in the last 5 years with major players like China, Middle East and Turkey which comprise 50% demand and US, India and Europe commanded 20% of gold in the form of coins and bars while Japan picked up the balance by using the metal in its industry.
You will get a myopic view of gold’s worth if you are focused on the demand of gold as related to the United States alone. Other big players such as top countries contribute a major role in pricing gold on a worldwide platform that influences global inflation, currency supply and demand as well as the global velocity of money, which in turn direct the future worth of gold.
Money versus Gold
It has been proven that gold remains stable and not very affected by bull or bear runs in the stock market; hence the varying financial assets of the world seem to have little impact on the shiny metal.
The important factor that impacts gold prices in the short or long term is the dollar. Hence, when gold prices dip, the dollar increases in strength and vice-versa. Gold has what is termed a negative correlation to the dollar. This shiny metal can outperform bond markets, stock markets and real estate valuations as observed since the 2007 economic crisis. Gold prices have been climbing up every year since.
On the other hand, money supply is increased when the economy booms to keep inflation away or when it is necessary to stimulate the ailing economy. But this is precisely the issue that could not be resolved amicably as reflected in the 2007 financial crisis when the depth of inflation could not be pinpointed with all the monetary policies set in place. Higher inflation still sprouted.
Reality Prices
In reality, gold prices are usually on the increase whether there is any increase in the demand for money or not. When the economy is booming, more wealth leads to more demand for gold products while gold is considered an asset that hedges against inflation in an economic recession which devalues paper currencies. Gold is more than an investment; it is an asset because it is a physical possession regardless of form as gold value has never touched zero.
Market conditions may change over time; it is important to appreciate the relationship between gold and currency set in the ever changing economic situations. A focus on the entirety of gold demand will lead to a better decision on the right time to purchase some of the shiny metal.
Recent Comments