Five reasons why gold fails to lose sheen

Investment

oi-Sneha

By Sneha B K

Published: Tuesday, July 3, 2012, 16:27 [IST]

Of all the precious metals, gold is considered a hedge against inflation and is dubbed a 'Safe Haven', especially during times of uncertainties, which is why it tends to outperform equities and other assets during political and economic turmoil.

Here are a few reasons why gold rallies through thick and thin.

Economy

Gold is an indicator of how healthy an economy is. When the economy's health is affected gold price tends to move up and vise versa. This means that the price of gold will be high when the economy is in trouble. This is because when the economy is healthy people tend to invest in other money making instruments such as stocks, bonds or real estate.

Fear

The deepening debt crises in Europe and its inability to cope with it has boosted the demand for gold in recent times as it is considered safe when compared to other investment avenues. The fear of fall in equities and doubts on a global economic recovery has over the years boosted the demand for gold.

Relation with dollar

Gold price and dollar are inversely related, as gold is bought and sold in US dollar. So any movement in the dollar tends to affect gold. Recently, the volatility in the dollar has affected gold prices. Gold tends to gain in value when dollar declines. The strength in the dollar weighs on gold.

Demand

Gold price also varies with demand and supply. Most of the time demand for gold surpasses that of supply, due to decline in production. Moreover, demand from China has remained robust, putting pressure on demand and hence prices.

Gold as an Investment

The reason why gold attracts investors is because of its value, as investors consider it a safe way for long-term investment, protection against bank failures, hedge against volatility in equities, and a better bet for a diversified portfolio. Other than investment, buying gold in India is mandatory for families during weddings and festivals. It's best bought in the form of jewelery. In India flaunting gold jewelery signifies status.

The reasons above make gold a valuable asset class, it is unlikely that the commodity will lose sheen in the future.

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