Gold As An Investible Asset Class

Gold As An Investible Asset Class

Although Gold is not the most valuable metal in the world anymore, it still holds many of its properties which makes it one of the most valuable metals in the world. The metal, with only a minimal industrial application, has captured the fancy of the human race for thousands of years. Its luster and its shining yellow color has always attracted woman and has been a symbol of wealth and affluence. It has been, traded, hoarded, stolen, fought war over and even been used as currency during its long history.  Its latest avatar is its application as an investable asset class.

The chemical property of gold that gives it its luster is resistance to corrosion to almost all types of corrosion which will make other metals lose their sheen. Even after long term usage as an ornament or after being stored in a humid place for a long time, it does not lose its yellowish shine. Though there are other metal alloys also that exhibit the same properties, gold remains the oldest known element exhibiting this property. The modern age, while still being mesmerized by its glitter, has been able to find some industrial applications for this metal. Mostly it is because of its acceptance as a currency and as a storage of wealth that its value and demand continue to grow.

The gold standard or the use of gold as the underlying to value any currency may have lost its importance in the world currency exchange system, but its acceptance as a currency and a valuable commodity of trade has not faded even a bit. Gold is still considered the most stable of all assets, an asset of all weather, providing safety, security and most importantly, liquidity. Given this property it assumed a role of an asset of last resort during times of financial distress, and as a hedge against capital market volatility. The physical trading of gold, though increasing at a fast pace, has been far surpassed by trading in gold derived financial instruments which are used for a variety of purposes. These instruments are becoming some of the most traded financial instruments of the modern times.

The price and demand of gold is influenced by many a factor, the primary amongst them being:

Production of GoldGold is produced from earth from gold bearing minerals and is an activity that has only increased in its scope with the passage of time. Even from medieval times, miners of all sizes have rummaged the earth to find this precious metal. Today China is the leading supplier of this metal followed by Australia, Russia, United States of America and Canada. Apart from that there have been several new discoveries made in Europe & Africa which would significantly increase the world supply of this metal in the time to come.

Demand for gold Jewelry – Currently nearly two-thirds of the world demand of gold is from the gold ornament industry. The country consuming the most gold on this account is India, followed by China, and then by the United States of America. The growing affluence, specially in south east Asia, has been the primary reason for the spur in demand of this metal on this account.

Industrial demand – The two chemical properties of gold, one of them being highly chemically inert and the other being resistant to electromagnetic radiation has found itself many an industrial usage. It is demanded in electrical junction points where a failure may prove to be catastrophic. Every cellular phone in the world has some amount of gold in its critical components, protecting them from corrosion induced failures, this by far is the single largest industrial usage of this metal as on today’s date. Gold’s resistance to electromagnetic radiation finds usage in space-oriented applications; satellites are usually wrapped in gold foil in order to protect its sensitive electronic equipment from harmful cosmic radiations.

Gold Reserves – Though the Gold standard is not prevalent anymore, still a lot of countries maintain large deposits of gold in the form of reserves with their central banks. Leading the pack among these countries is the United States of America which as of 1 November 2019 held 8,133.5 tons of gold representing 76.9 percent of its total forex reserves; This is followed by Germany, which held 3.366.8 tons of gold as on that date representing 73.0 percent of its total forex reserves; The International Monetary fund held 2,814 tons of gold as on that date. The demand on this account is ever increasing, particularly so during times of global financial turmoil.

Hedge against Financial stress – Gold is used by may investment managers to hedge against risks associated with equity and other capital markets. Gold as a hedging instrument is used extensively against inflation, deflation and currency devaluation though its efficacy has been diminishing on this account over time. One of the unique features about gold is that it has no default risk, and in the construction of an investment portfolio, it is the only one asset that can be used to reduce systematic risk.

All of the above factors lend gold a strong case to begin investing with. Today investment in gold is taking place in the form of derivative instruments like futures and options contracts. Gold certificates, which represent a certain quantity of gold, are traded as financial instruments and there are gold Exchange traded funds (ETFs) which invest in gold for long term capital gains. Principal markets where gold is traded is the London Bullion Market (LBMA) and COMEX in Chicago. While London Bullion Market (LBMA) is responsible for the most physical transaction of the metal, COMEX is the largest derivative exchange for this metal.

For an individual investor the best way to invest in gold for investment purposed is to invest in gold certificates or gold bonds, as they are available in units according to the quantum of investment and can only be transferred by endorsement.  This form of investment does not carry the burden of taking delivery, carriage and storage as is associated with the physical metal.

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