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Wednesday, August 12, 2009

A Quick Look At Why Gold Is A Great Investment

Updated: May 2016

Gold needs no introduction – a cherished commodity in some cultures and one of the most preferred investments, en said specially in turbulent times. If you are investing, take it as a long term value proposition, rather than a short term profit making tool. Whenever the global economy hit a roadblock, gold had witnessed a surge in demand. Over a decade spanning from May 2006 to May 2016, gold price has more than doubled from approx USD/oz 682 to USD/oz 1,302!

In the shorter term, stock markets may appear glossier with quicker returns on the back of frenzied activities during bull runs. On the flip side, the same markets can be very volatile and often ‘sentimental.’ While the matured stock markets are often said to mirror the fundamental strength of the economy, they react to news and often, half-baked information, at the blink of the eye.

Gold, however, is more stable in terms of returns, more so because its demand does not completely erode, at any point of time. There are various ways to invest in gold, such as bullion. It is important not only for its investment value, but also for its traditional and religious significant symbolism in various cultures across the globe. For instance, Middle Eastern Countries, Indian Subcontinent, and Eastern Asia seek gold for its religious value, more than its investment utility. Overall, Middle East is the biggest consumer of gold, followed by Asia. That said, gold prices do fluctuate like any other commodity – sometimes skyrocketing and sometimes supporting at moderate levels.

Key Determinants of Gold Price

  • Demand. The demand for gold has seasonality because it finds traditional and religious use, apart from investments. Predictably, the demand is higher during festivals, including marriage seasons. According, to the World Gold Council, the demand for gold is highest in the last quarter of the year, due to the simultaneous peak season in various regions.
  • US Dollar Rate. The benchmark gold price is denominated in terms of US Dollars and therefore, is inversely proportional to the prevailing Dollar rate.
  • Government Transactions. According to an estimate, the Central Banks world over, have almost 20% of the mined gold in their reserves. These banks adopt measures for regulating gold prices, similar to those used for inflation control. This, in turn, affects the domestic prices.
  • Alternative Investment. Gold has ever been an effective alternative investment and protection against a bumpy economy, due to the stability of its returns. This is mainly due to the erosion in the value of currency and other investment options, such as stocks. Therefore, it gains induced momentum in recessionary times.

Eurion Constellation is a research and consulting firm serving businesses in U.S., Europe and India. The research services have a global reach with focus on industry / market / economic research, financial analysis, equity research, company valuations and report writing. The consulting wing in India focuses on the startup and SME sectors. Please feel free to get in touch for any business requirements. Visit http://www.eurionconstellation.com

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