Why Gold is getting shiner?
In this time, the whole world is facing a crisis that hit all economies and it radically affected all investment assets. By then, the whole world realized there is no safer investment than gold. While other investment assets are suffering, gold is getting shiner, proving once again to be the investors' safe haven.
Gold is popular with its history as a safe-haven asset for many reasons. It is easy to liquidate, unlikely to be replaced with other investments, and of limited supply; and consequently, it preserves its value over time. Since the time value of money holds, and the negative relation between gold and the good economies persists, gold still and will be the winner.
Time Value of Money... How is it Positive for Gold?
Simply, the paper currency (e.g. the US dollar) will not be able “NOW” to purchase the same amount of, say “loaf of bread” that could be purchased before, in the “PAST”, e.g. from 20 years ago.
If you need to earn in the future say after 5 years US10,000, with a 10% return, you need to give up now about US6,209. This investment could be through purchasing a certificate of deposit (CD) from a bank for 5 years, meaning that you will not use this amount of investment until the end of its maturity.
You should also note that the return which is 10% is more than for example the inflation rate and the difference (Return earned – Inflation Rate) will be your real return. So if this equation doesn’t hold at any time, you, in this case, will lose on your invested money.
While gold preserves the value of your investment in the longer term (to be further discussed in a later section), the currencies will not because of this time value of money theory.
Is Gold Getting Shiner due to Coronavirus?
Gold has been the most stable asset for investors in times of economic risk. With the COVID – 19 outbreak, the big economies and their currencies were significantly hit. Commenting on the situation, the International Monetary Fund (IMF) has projected a recession in the global economy of -4.9 percent in 2020.
The IMF sees the present recession as the worst since the Great Depression in 1929, which witnessed global economic shrinkage of 10%. On the same side, Federal Reserve predicts that the interest rate is unlikely to increase before the end of 2022. As previously indicated, with the negative correlation between gold and good economies, Gold always outperforms other investment assets in times of crisis.
In the aftermath of the Covid-19 crises, Bank of America has lately raised its 18-month gold price aim to 3,000 an ounce. Philip Lane, European Central Bank Chief Economist, declared that the economy of the Eurozone would need a long time to improve. All the recent bad news for the global economy and the recovers that it was expected to be in a long time, makes gold the winner investment option. The virus gave the whole world learned lessons of how a crisis could change investors’ behaviors and think of more secured cash asset classes for unexpected bad times.
Gold is one of a kind
Mine production is the main source of gold supply, accounting for about 75 percent, according to the World Gold Council. Although the global annual demand requires more gold which is fulfilled through recycling, gold has its special reputation because of its rareness. The gold mining activity, according to the World Gold Council, was somehow stable during the last period, which is absorbable in the following graph. Accordingly, the supply of gold will never outnumber the demand; a thing that retains its value over time.
Gold is a Liquid Asset
Liquid assets are the assets that can be easily changed into cash. Compared to real estate, gold can be easily liquidated. For instance, it’s quite challenging to find another investor with whom you can exchange your real estate asset, say “apartment”, with cash in a short time span, or even sell half of a unit. On the other hand, gold bullion can be bought and sold more easily, especially that options of bullion, bars, and ingots start from 1 gram up to 1000 grams.
The number of gold companies, stores, and online channels facilitates the exchange with cash easily. Liquid assets are perceived as similar to cash, except that the cost of gold retains or even increases its value at the time of sale. Because of this characteristic, gold preserves its value. If you need cash in a faster way, and you have an apartment, finding another investor who needs your apartment will take time, and if you urgently need cash, you may lower the target price to easily find this investor, so you will lose part of its value.
Gold is getting shiner and the current situation indicates that this is likely to continue after 2020. The negative economic impact of the Corona-virus and the expectations that the recovery will take time is one of the reasons. The likelihood of this negative impact on currencies of larger economies and the time value of money is also supporting. The scarceness and the liquidity of the yellow metal maintain the asset class as a shiner investment option.
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