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What are the main reasons to buy gold today? That is the question that the World Gold Council tries to answer in a new report on the gold market. According to the organization, the precious metal is a valuable addition to the investment portfolio, because it has yielded good returns and has no counterparty risk. Gold also appears to perform well in times of uncertainty, making it a good way to spread risk.
Since the beginning of this century, the price of gold has risen sharply. Since 2001, global demand for gold has increased by an average of 15% per year. This is not only because it is becoming easier and easier to gold investing, but also because disposable income has risen sharply in emerging economies. But what makes the precious metal so attractive?
The Gold price can fluctuate greatly over the years, but over the longer term, the price has risen significantly. That's not because gold is getting better — it doesn't change, nor does it generate cash flow or dividends — but because the money supply is increasing. There is more and more money in the world, which is causing the prices of all tangible assets to rise.
Gold is not doing much worse than alternatives such as stocks and bonds. Since 1971, the price of gold has risen by an average of 10.45% per year, about the same as US stocks (10.52%) and global stocks (11.07%). In comparison, U.S. Treasuries yielded an average return of 7.53% per year over the same period. In recent decades, the precious metal has been able to compete well with equities in terms of returns.
Return of gold since 1971 (Source: World Gold Council)
In the short term, there is no clear relationship between the price development of gold and inflation, but we do see a certain correlation over the longer term. When inflation is higher than 3%, the precious metal appears to yield much more return than when inflation is relatively low. The precious metal has thus proven its usefulness in times of currency depreciation in recent decades.
Precious metal performs well in times of high inflation (Source: World Gold Council)
One of the main advantages of the precious metal is that it cannot be created endlessly, unlike currency. If we look at the past 120 years, we see that all currencies consistently lose value against the precious metal in the long run. And this is despite the fact that above-ground gold reserves have increased significantly in the same period. The precious metal therefore has a good track record in terms of preserving wealth over the longer term.
Purchasing power of currencies against gold (Source: World Gold Council)
In times of stock market uncertainty, investors flee to safe havens such as government bonds and precious metals. For example, gold historically appears to perform well in times when the stock market is falling. When the S&P 500 falls by more than two standard deviations, the precious metal has a clear negative correlation. This means that the price of gold often rises on bad trading days.
Protection against stock market corrections (Source: World Gold Council)
Every day, more than $100 billion worth of gold is traded on the exchange. This puts the gold market almost on par with the main markets for stocks and bonds. It is estimated that households and central banks collectively own $2.9 trillion worth of gold. Due to the size of the market and the daily trading volume, even large players such as central banks and mutual funds can easily trade precious metals.
The precious metal can compete with government bonds in terms of liquidity (Source: World Gold Council)
An investment in precious metals has many advantages, but there are also a number of things to take into account. For example, the gold price can also fall in the short and medium term, causing the return to be much lower or even negative. Also, bullion is tied to a physical location, which means that there are more costs involved in transportation. Also, due to the high value of precious metals, extra attention is required for storage. If you want to keep the precious metal safe, you can Professional storage consider.
