Gold has been a part of world cultures for thousands of years and is known for its value and rich history. Societies, now economies, have placed massive value on gold, thereby perpetuating its worth.
People fall back on gold as the last resort when other forms of currency fail them. This essentially means that it has some value as insurance against tough times.
As the Coronavirus pandemic turned a health crisis into an economic upheaval and the world battles the worst-ever economic slowdown, investor sentiments have hit an all-time low.
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As stock markets crashed, gold acted as a safe haven for investors. It did falter but not nearly as much as other equities. You can know more here about the safety net offered by this commodity in the testing times.
Here are some reasons that make gold a haven for investment options amidst the pandemic.
Store of Value
Gold is considered a store of value. This is because it is not impacted by the interest rate fluctuations of the government. Moreover, it cannot be printed like money and therefore is in finite supply. Gold maintains its value through the ages and is passed on from one generation to the next.
The Weakening of the Dollar Strengthens Gold Prices
When the world goes into recession, such as the current crisis, the world’s most valuable currency the US Dollar takes a hit and falls against other currencies. This leads people to flock to the security of gold, thereby raising gold prices.
Hedge Against Inflation
Gold has historically been regarded as a hedge against inflation. This is because it is priced in the local currency, and therefore, it becomes even more expensive. It has happened in the past that gold prices soar when stock markets plunge. This is because when people see that their money is losing value, they prefer to turn their funds into gold.
Diversification
Many people have gold in their portfolios for diversification against standard assets like stocks, bonds, private equity, or real estate. It does not pay anything or provide dividends, yet the CAGR of Gold since 1971 (when the free market for metals was created) has been 7.75%.
Also, the key to diversification lies in finding assets that are not related to one another. Gold is negatively correlated to stocks and equities. History stands testimony to the fact that when gold rises, stocks dip and vice versa.
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Supply Constraints
Since gold is in limited supply, it cannot be printed whenever like other currencies. Further, the global health crisis caused gold mines to close down, and production was halted. Moreover, the selling of gold bullion by Central banks has slowed greatly since 2008, creating a further shortage of supply.
As a result, gold prices are rising and would continue to rise because the supply is unlikely to step up any time soon.
Bottom Line
Should gold be a part of your diversified investment portfolio? The answer is a resounding yes as its price increases when the value of other investments declines.
It works as a hedge against inflation and devaluation in currencies. All in all, it is an investment worth considering.
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