The Rise of Gold

The recession has hit our world economy with a hard blow. Anything made of money is seen to crumble. Stock markets and banks seem to have almost collapsed, so much so that they are no longer a safe bet for investors. Indeed the recession seems to foretell a depression not only in our economy but in other realms of our lifestyle as well since everything depends on the economy.

So what is the next big thing when currency no longer holds any stability? Where will investors squander the money they still have left? What will fatten their pockets once again? The answer is gold. Investors around the world are throwing their money into gold investments. It has become their safe haven.

Now, the next big question that comes to mind is, “why gold?” The answer to this is simple: the yellow metal has always been stable against any kind of uncertainty in the past, as stable as its position in the periodic table. Even though its value is not immune to minor changes, its value is never doubted. The blow dealt by the recession has affected the currencies of several countries. The value of the euro and the dollar, which have always been stable and considered benchmarks in the markets, are losing their value.  Investors no longer trust their worth.  On the other hand, economic analysts have shown that over the past five years, the gold market has blossomed vigorously, especially in the past two years. Besides its increased value, gold also ensures promising year-to-year returns.

The value of gold has increased by 19% since the year 2003-04. Business surveys show gold’s value appreciating by 4.38% while the Sensex and bank investment have shown an appreciation of 0.11 and 3 % respectively over the last six months. Gold’s return on investment, on the other hand, shows an absolute return rate of 208% beating all equities which offer an absolute return value of only 160% over the last five years. From this one can draw the conclusion that it is only natural for investors to turn their attention from their long and once reliable equities of stock and shares to the appreciating market for the yellow metal.

Explaining this economic phenomenon, Religare Commodities president, Jayant Manglik says, “Money will find a place where it will earn returns. Due to lack of any safe destination around today, money is being parked in gold. Interest rates around the world are low and inflation is high, so returns are negative. Therefore, over the next six months at least, gold will continue to deliver good returns.”

Even India is caught up in this quest for gold. Seeing the gains that gold has to offer, the Reserve Bank of India has turned away from assets like the dollar. In November 2009, the Reserve Bank of India bought 200 tonnes of gold from the International Monetary Fund to put their plan into effect.

In the past, gold has only existed in correlation with crude oil and its value increases only when the price of crude oil increases. The reason for this is that the value of gold rallied only as a consequence of inflation anxiety in the market. However correlation theories regarding gold no longer hold good today, especially during the recession, due to the fall in the price of the euro and the dollar, which directly affect the Sensex returns and dollar-denominated portfolios and reserves of central banks whose reserves are mainly in dollars.  The catch, however, is that the dollar is appreciating again against other currencies and this will inversely affect the value of gold. Analyses, however, show that the price of gold is not depreciating; in fact the value of the euro is still lower than the dollar, in other words, the correlation of gold with the euro is said to be negative.

In short, the value of gold is not depreciating. In fact, experts have predicted its increase in value. However, with this excess fluidity, there is also a fear of inflation so the chances of its price falling are higher that that of its rising. This may perhaps be true but the climb is more likely as proven by the fact that the reserves in central banks are now mainly only in gold. Despite this uncertainty, a World Gold Council report says that this uncertainty is comparatively less than that of the dollar or of the euro; for, while a lot of countries are on their way to coming out of the recession, the time needed for complete recovery is still a lot. Till then gold’s value would continue its climb and may even beat the dollar and the euro, even post the recession.

Badakynti Nylla Iangngap

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