Gold rallied to a record high and gold futures touched more than $2,000 an ounce as financial markets digested the havoc caused by the Wuhan coronavirus pandemic.
And that breathed new life into the old question of why investors still bother with what’s likely the most primitive form of money in their portfolios.
Bullion is best known as a time-honored haven from inflation, but there’s more to its appeal, and plenty of conflicting forces at work that can excite commentators and investors.
Is Gold an Inflation Hedge?
The short answer is yes, and no. Research suggests gold’s purchasing power remains relatively stable over very, very long periods.
Gold Prices
(Source www.gold.org)
Price August 8 2017 = INR2584.78/gram
Price August 8 2020 = INR4964.41/gram
However since late 2018, the metal rallied 70%, yet inflation has remained subdued, and is below the level targeted by most of the world’s big central banks.
Gold can also be considered a Veblen good, which means that as its price goes up, it can become even more desired.
When gold rallies, it excites commentators and investors -- so more is written about it, which can lead to more money flowing in. At those times, rallies can become self-perpetuating. That might help explain gold’s propensity to trend -- its autocorrelation, where one period’s returns are echoed in the next, is strong.
But then here are 8 reasons why Gold may still remain strong
- Growing concerns over US-China relations.
- COVID-19 uncertainty and potential economic weakness.
- Record monetary stimulus. The Federal Reserve (Fed) balance sheet exploded to $7 trillion recently, from $4 trillion before COVID-19.
- Nearly $15 billion worth of negative sovereign debt globally.
- Record trade and budget deficits.
- 0% interest rate policy is likely here to stay.
- Negative real-rates, making gold’s 0% interest look pretty good.
- Huge government spending programs may spur inflation.
