Gold, is it just a hedge or more?
Team Veye | 02-Sep-2019
Gold has long been stored throughout the world primarily for its value and rich history. Ever since people have bought gold for various reasons. Gold can be used as a hedge against inflation and deflation alike. Its unique and beautiful color, noncorrosive nature, easy to melt and work upon and other physical properties make it ideal for ornamental usage.
In times of financial uncertainty, gold most likely holds its value and price. Whenever there have been global tensions people resort to investment in gold rather than traditional investments. The current tariff war has seen huge movement in gold.
Emerging markets have witnessed increased demand in the commodity. Like in China, gold bars are a traditional form of saving or India, where, during the marriage season especially, the demand for gold is huge and among the highest globally.
Gold is also becoming an important segment of an investment portfolio. Gold has always had a negative correlation to stocks and financial instruments. History has been a witness to 1970s demand for gold but adverse for stocks, or 2008, when stocks had a huge drop and investors switching to gold. People now seem to have realised that the best thing is to combine gold with stocks and bonds in one's portfolio to mitigate the overall risk and volatility.
Although the price of gold could be volatile in the short term it has always maintained its value over the long term. As a hedge against inflation and erosion of major currencies, it has always served the purpose.
Gold is also inversely correlated to the US dollar. Since international gold is dollar-denominated, any weakness in the dollar pushes up gold prices and vice versa.
There is another widespread popular belief of a negative correlation between interest rates and the price of gold. It has come out to be only partly true. Because gold is basically a commodity and like most other commodities it is ruled by supply and demand in the long run. And eventually just by demand as supply is rather limited and it takes a long time to convert a deposit bearing mine to commercially start supplying.
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