Why Gold is a precious metal?
Mohammed Shaheen
13-06-2021
We are in the age where physical cash has become digital and people have started to invest in more options like gold, forex, and crypto. Besides all of the development in the past years, gold has been reigning a secured position in the marketplace.
From being a precious metal and a commodity of high returns, gold s no one’s liability and carries no counter-party risk. As such, it can play a fundamental role in an investment portfolio. Gold acts as a diversifier and a vehicle to mitigate losses in times of market stress. It can serve as a hedge against inflation and currency risk.
But why gold is considered a precious metal? Despite diamonds being in the picture of the financial market, gold continues to increase its popularity as the most favorite commodity amongst the people.
BUT WHAT ARE THE FACTORS THAT MAKE GOLD PRECIOUS ABOVE ALL OTHER METALS?
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Gold is a mainstream asset driven by many factors, not just investment demand
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Gold is one of the most effective diversifiers
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Gold provides competitive returns compared to other major financial assets
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Gold offers downside protection and positive performance
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Over time, fiat currencies – including the US dollar – tend to fall in value against gold.
SEEKING SECURITY IN THE STOCK MARKET!
Gold trading has long been a safe bet. While investing in cryptocurrencies has proven to be a risky approach, the forex market offers gold-like stability for the technologically minded.
Let us helps investors understand how investments in gold can help them achieve their investment objectives.
The easiest way to gain exposure to gold is through the stock market, via which you can invest in actual gold bullion or the shares of gold-mining companies. Investing in gold bullion won’t offer the leverage you would get from investing in gold-mining stocks. As the price of gold goes up, miners’ higher profit margins can boost earnings exponentially. Suppose a mining company has a profit margin of $200 when the price of gold is $1000. If the price rises 10%, to $1100 an ounce, the operating margin of the gold miners goes up to $300 – a 50% increase.
In the long term, what makes gold shine so bright in the eyes of investors is what has become a semi-permanent feature of the global economy: low-interest rates, occasionally falling below zero. “If rates are high, you lose money by holding gold because of storage and insurance costs. But right now with yields being negative, gold is cheaper than holding US treasuries,” Dahdah said. Normally, the precious metal is also disadvantaged against other assets due to a lack of earnings such as interest payments. However, in an era of dwindling returns, it has emerged supreme. In financial markets, the pandemic kick-started a chain reaction, according to David Govett, veteran trader and head of Govett Precious Metals, a consultancy: “This was the trigger, which in turn created a sort of reverse snowball effect. The higher it went, the more it attracted ETF, investment fund and speculative money.”
Even before the pandemic, many analysts were predicting that gold prices would rise, as clouds were gathering over the global economy. In 2019, the global debt to GDP ratio surged to a staggering 322 percent according to the Institute of International Finance, with many developed economies on the brink of recession. Leveraged loans held by financial institutions and ‘zombie’ companies had reached stratospheric levels, pointing to the devaluation of the dollar.
