King of metals, “Gold,” has shown a tremendous surge from US$35 (1971 trading price) to $850 at the end of the decade. This price has surpassed all records by hitting an all-time high $2067.15 during the pandemic.
The yellow metal has been a mysterious metal for ages. Unlike silver and other metals, it organically occupies a subtle array of beautiful and unique colours.
Many people argue that gold is a “barbarous relic,” does not carry an intrinsic value, and has lost its historic monetary characteristics. So, the major questions now are, do these arguments have any base?
Why does gold still hold a unique position in financial market trading? Let’s find answers to these questions considering the gold’s entire journey from past till date.
How gold came into the limelight?
People across the world revere gold because of its rich history and intrinsic value. They have interwoven this metal into art and cultures for centuries. Initially, it was used as a medium of exchange, but slowly its use and importance surged.
The gold minted coins emerged around 800 B.C. The first gold coin was introduced during the time of King Croesus of Lydia.
For ages, people have continued to retain this precious metal for numerous reasons. Societies and now the financial market have provided value to gold.
The rise in technology and advanced brokerage firms like Brokereo has also added a feather to gold trading.
Hence, preserving its worth. Moreover, it is a worthy and ultimate instrument that we can back upon when other types of currencies fail.
This means that it acts as insurance against challenging situations.
Why does every investor want gold in their trading portfolio?
The argument presented above that gold has lost its importance over a year is absolutely baseless. Most of the investors and traders today find it essential to hold this metal in their trading portfolio.
They further believe that there are numerous to justify this point.
Protection against deflation
Deflation occurs when business activity stalls, prices decline, and debt overburdens the economy. The most popular example of this is the Great Depression of the year 1930.
No, deflation occurred after this event. However, some parts of the world saw a small shadow after the financial crisis of 2008.
At the time of this deflation, the corresponding purchasing power of gold increased while the market saw a sharp drop in other prices. This was because people preferred to acquire cash, and there was no better option than holding this in gold or gold coins.
Hedge against inflation
Gold is an excellent instrument that hedges against inflation. Its price surges when the cost of living rises. In the past 60 years, many traders have seen stock trading plunge and gold prices sail at the time of high inflation.
Additionally, traders prefer to buy gold when they think that a domestic currency’s value is declining because gold is regarded as a “store of value”.
Savage at the time of weak dollar
There is an inverse relationship between one of the strongest reserve currencies, the U.S. dollar and precious metal gold.
Between 1998 and 2008, the value of greenbacks declined against other currencies, and at this time, the value of gold surged suddenly, and people holding it earned about triple profit.
The value reached $1,000-an-ounce in early 2008 and approximately doubled between 2008 and 2012, reaching around $1800-$1900.
The Best way to diversity trading portfolio
There is a famous adage that one should never keep all eggs in the same basket. The same applies to the global financial market.
Diversification of portfolio means choosing those investment instruments that are not closely linked to one another.
Gold has a negative correlation with other financial assets, mainly stocks. Hence, traders usually prefer to keep gold and bonds, gold and stocks in their basket to mitigate the overall risk due to volatility.
- The year 1970 was excellent for yellow metal but at the same time worse for stocks.
- The time between the 1980s and 1990s was great for stocks but terrible for gold.
- In 2008 many traders shifted to gold, and hence the stock market faced a sharp drop.
Retain value at the time of geopolitical uncertainty
Many consider that gold is only suitable at the time of geopolitical uncertainty. But, it also has the power to retain its value at times of geopolitical uncertainty.
The other name for this yellow metal could be “crisis commodity,” as traders and investors flee to its relative security when world tensions increase.
Moreover, it usually outperforms during such situations in comparison to other investments.
The best example explaining this is the crisis in the European Union. The gold prices this year showed major price shifts in response.
Thus, its prices usually increase when people lose confidence in the government.
The interference of gold in the economy
The rise and downfall in the price of gold also influence the value of currencies and hence, the economy. The surge in price can be majorly vital for gold-producing economies. South Africa, Australia, and Canada are some major producers of gold.
If you think that the price of gold will surge sharply in the near future, then you can definitely opt for trades in the ZAR (South African Rand), the AUD (Australian dollar and the CAD (Canadian dollar).
There is a strong possibility that the price of these currencies will rise.
Therefore, one cannot deny the vital role of gold price when economic and political conditions vary, for example, when the global inflation rate is surging. Keeping an eye on each move can lead to massive gains.
The Bottom Line
For humanity, gold has always held a unique place of real and representative value. The people initially adopted it as a store of value, medium of exchange, and valuable artefacts and jewellery.
It extended even more with the expanding civilisation. Gold trading today has become a popular medium to make a profit out of the market. Therefore, it has never lost its value and will never see a downfall in the future.
Yes, the value may fluctuate, but no factor/asset/currency can throw gold out of the investment race.