Gold has remained a unique and valuable metal for centuries. In the 650s B.C., gold coins were used for trading. Then in the early 1800s, the era of the classical gold standard started in England, spreading to Europe and the United States. Since then, gold has been a long-standing safe haven.
According to the World Gold Council (WGC), investment demand for gold has increased by 15% every year on average since 2001. This growth is primarily driven by the introduction of various investment vehicles to access the gold market, such as physical, gold-backed exchange-traded funds (ETFs). The rise in gold demand can also be attributed to the growing size of Asia's middle class and a higher emphasis on risk management following the 2008-2009 financial crisis. And with the recent repercussions resulting from the pandemic and the geopolitical tensions, total demand for gold increased further to levels last seen in 2011, as seen in Figure 1 below. In 2022, the yearly average LBMA gold price PM reached a new high of US$1,800/oz, according to Gold Hub.
Source: World Gold Council
Gold is viewed as a hedge against inflation because of its intrinsic value, and it frequently performs well when inflation levels soar. Commodities, in general, have the highest inflation beta of any asset class evaluated over the previous 30 years, ranging between 6 and 9. This suggests that a 1% increase in unexpected inflation results in a 6%-9% increase in commodities, according to a study by Vanguard. In other words, a small but strategic commodity investment can provide an important hedge for the overall performance of a portfolio.
It is important to note though that gold performs better as a long-term investment. In the short term, the opportunity cost of owning gold is high because governments usually adopt tightening monetary policy at times of high inflationary pressures, which means rising interest rates, and because gold as a physical asset yields no returns, you would be foregoing another asset that could potentially provide a higher return.
Due to its intrinsic features and historical significance, gold occupies a unique position as a worthwhile investment. Because of its scarcity, durability, and worldwide appeal, gold is a dependable store of value and a hedge against economic uncertainty. Furthermore, its lengthy history as a safe haven asset, as well as its capacity to retain purchasing power over time, adds to its allure for investors. Gold is still sought after for its enduring worth and potential for capital appreciation, whether as a diversification tool or a long-term asset preservation plan.
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