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The gold price was at $1933 an ounce in September 2020, and some experts estimate it can grow beyond $2000 in the coming months.
In August, the rate was at $2075, which indicates a 26.5 per cent gain YTD(year to date) and 30.9 per cent gains since the 52-week low in March; in contrast, the S&P 500 gained 6.3 per cent YTD.
The rally represents the highest gains as investors find investing safe when the markets are volatile.
Due to the impact of COVID-19, several global economic activities suffered some impediments. Still, the investors seeking options in hedge funds and Wall Street remained extremely bullish on gold, and some predicted absurd levels like over $4000 an ounce in the coming years.
The Bank of America Merrill Lynch expects its value to hit $3000 by early 2022, and the billionaire Thomas Kaplan expects the rate to cross $5000.
Economists have mocked gold in the past, and some top investors rejected it against global currencies, stating the metal has nothing to do with the economy or industries. Still, even those rejecting gold are buying it now, and they expect the gold prices in the UK to be at any level in the long term.
The main reason is the loss of value and credibility of currency as a monetary unit where the central banks supply monetary units far exceeding the amount that can be absorbed into the markets. Now, the value of cash is declining. Gold has limited resources, and it cannot be supplied in excess.
Further, there is anxiety over the global dollar-based trading where the US had abandoned gold for a strong dollar, which served as a reserve currency only on the terms that it would not lose value in the long term. Nevertheless, the US currency has become volatile, and there is the risk of a currency war between China and the US, where the devaluation of certain monetary units can create fluctuations in global commerce and create turmoil.
Gold is a yellow metal called Aurum (Latin), whose names mean shining dawn or the glow of the sunrise. It is a highly malleable metal, as 28 grams can be stretched into 8 kilometres.
Its threads are used in embroidery. It is highly malleable as it can be hammered into thin sheets. It is considered one of the most malleable elements that can be beaten into a 300-square-foot sheet. The sheets can be beaten into thin layers that can become transparent at one point.
It is heavy, dense, and non-toxic, and its flakes can be added to foods or drinks. The flakes and the small pieces are also used in electronics and beautification products.
It is an unreactive noble metal that resists degradation by air or acidic solutions. While acids can dissolve, a special mixture can dissolve gold metal.
The amalgamation of metal like copper can make the metal look rose to pink, and sometimes, metal oxides are added to the alloy surface to get different colours like blue, purple, or black.
The weight of the metal is measured in troy ounces (1 troy ounce is 31.10 gms). Karatage is used to measure purity. The purest form is mostly 24 karats, the 18 karat version is 75 per cent pure metal, 14 karat is 58.5 per cent, and ten is 41.7 per cent pure.
The metal has been known since historical times for its natural radiance; these days, it is available in a diverse palette. Mixing many such metals to get 24 karat helps to get a malleable and durable composition.
It is used to make jewellery and is, sometimes, combined with other precious metals to get a stable composition that can be used to make jewellery. Such a version can be used to change the colour of gold.
Such items from different countries have different standards for karate. The minimum accepted cartage in the US is 10 Karatage; the most popular is 14 Karat.
In France, Austria, the UK, Ireland and Portugal, the lowest is 9 Karat, and in Denmark - the lowest legally permitted Karatage is 8.
There are various other risks, like a bubble in the bond market, which is getting bubblier, and the value of negative bonds continues to expand to $50 trillion. Investors are calculating the risk of all the turmoil where they believe the currencies will be at their bottom since 1971, and stock markets will soon collapse. Still, in America, some analysts believe the gold prices in the UK can get back to $700 an ounce, although some factors may support the growth in the price of the yellow metal.
The global economy is volatile; the price of yellow metal can increase, and the price of paper money can decline. Gold prices in the UK remain constant with the exceptions of regular fluctuations where it represents the buyer's purchasing power and the value of paper money in circulation is zero. Measuring the metal in the dollar tells how weak the currency is.
The global bubble burst is expected soon, which can be triggered by specific events. The fall of Lehman was one such event in 2008, though it was not the reason for the financial crisis.
In the futile attempt to save banks, the ECB is preparing to print €10s of trillions; such a reduction in currency value can only lead to hyperinflation, like in Venezuela, where the economic collapse created hyperinflation, and Argentina is expected to follow the same.
The bubble era is working on massive accounting frauds where companies are cheating through their accounts. Some examples of accounting fraud are Enron and Madoff.
Manipulations in financial numbers will lead to misunderstandings, raising the risk of a major crisis. The markets in China and India are buying very little; in countries like Indonesia and Thailand, the buyers buy from the local markets.
Gold is not related to physical demand, but physical wealth preservation techniques are based on holding the metal as it provides insurance against such volatility and fraud.
Gold and silver are safe havens that can help during heightened economic uncertainties.
All the investors put some per cent of their money into precious metals as they can rise exponentially, and no other precious metal has been able to match the growth rates of gold.
It cannot be destroyed easily if stored in physical form at safe storage.
It can be bought or sold anywhere in the world at the same rate.
It retains value during an economic crisis, even when paper money loses value.
It can be transported from one place to another, and its value increases after regular intervals; its value, not often, decreases like shares and bonds.
The World Bank has been predicting a crisis that can bring the global economy into the worst recession since WWII. The global pandemic has created a situation where the demand for safe havens has increased. Such markets are expected to flourish during an economic crisis as other safe options like bonds offer flat or negative returns.
The global economies faced issues even before the pandemic hit markets where the world's central banks cut interest rates to historic lows. The investors had to turn to such options in the low-interest environment; at the same time, the interest rate–gold nexus has weakened since the 1970s after the US abandoned the gold standard. Nixon had to change the dollar-gold standard when the US was running out of the necessary gold to back the paper money it had printed.
Gold supply has no direct relation to the economic performance of a mining country. After discovering huge gold reserves in South America, the supply of yellow metal has been rigid.
Its demand can vary, but it provides the country with a stable source of earnings. Many countries escaped the Great Depression of the 1930s by unhitching their money value against gold.
Some companies have started space-based research and mining programs that expect to conduct mining programs on other planets, and some believe that aliens come to Earth in search of gold.
In South Africa, the researchers at the first UFO Science and Consciousness Conference claim a small group of families whose origin is traced to be the first of mankind had relations with aliens, and all governments and institutions were instruments to the will of this small group of individuals.
They claim that the South African government was governed by extraterrestrial beings as the country was rich in gold and diamonds, while humans were also part of the galactic population. These extraterrestrial beings are obsessed with gold and come to Earth looking for it.
Gold gained above $2000 in August 2020, one of the highest since April 2013. At the same time, silver prices jumped 3.2% to $26.84 an ounce. Silver has risen by 50 per cent in 2020, which means it has been outperforming the yellow metal and is still trading at a ratio of 75: 1.
The long-term average of the two metals' price-to-weight ratio has been at 60:1, indicating there is scope for silver to gain more. Both metals have been known since antiquity. Silver can be divided into smaller units; it is highly durable, portable and cognizable.
Both metals have served as a reliable store of value where they have retained purchasing power relative to other goods, services, or commodities.
They are considered tangible, and many high-net-worth individuals and royalties invest in such options instead of abstract financial vehicles. Both metal coins were historically used for overseas trade and settlement of international debts in the 18th and 19th centuries.
Silver was considered crucial in international trade in historical regions like the Middle East and North Africa in the 19th century when Arab merchants traded such coins.
Many such large coins were sent to China in 1800 for business activities. It was recognized as legal tender until after the Civil War in the US.
But there are certain drawbacks related to the investment in silver, which is subject to VAT if one takes its physical delivery, whereas gold is VAT-free in the UK and the EU. There are some European countries like Switzerland where one can store silver to get the VAT-free option.
It is rare throughout the universe as its atom contains hefty - 79 protons and 118 neutrons. But it is more abundant than large diamonds and some other elements. Rarity is not the only decider of the value of the metal.
It is only one side of the supply and demand theory where the demand can be relatively higher for gold than silver, affecting the price.
The central banks are putting stimulus into the financial markets to support global economies, which the COVID pandemic has hit. The price of the yellow metal was at a record high in the last few months because it retains value over time compared to paper money, but it lacks regular interest like government bonds.
It is bought by investors mainly for the gains incurred for holding. Hence, investors can see a migration from low-yielding cash and bonds to long-term store value.
Gold is widely used in jewellery and drives prices higher because of high demand.
Some market buyers consider commodities the most valuable assets as they hold intrinsic value and work as a safe money store even during a crisis.
Having $1000 in the bank would not be the same as yellow metal because paper money will lose its value by over 50% if held for 5 to 10 years.
Buying precious metals for long-term investment provides a hedge against inflation.
The metal is widely known for its historical significance, where it has proven to be wealth insurance. The metal's price remained at a record high when governments worldwide ran huge debts and adopted methods of qualitative easing or money printing to lessen the economic shock.
Gold coins were extracted in 550 BC by the King Croesus of Lydia (an area that is now part of Turkey). It was highly treasured as it helped increase commerce, and the emperor Augustus formally ordered the acceptance of gold for the transaction.
In 1971, the metal was made the basis of all the global currency transactions where governments could convert the notes into gold at a fixed rate.
According to Warren Buffet, the investment made in the S&P 500 of $10,000 in 1942 would turn into $51m in 2018. The same investment in gold will grow to $0.4m, which means the precious metal might have done well if invested in the long term, but stocks outperform it if invested carefully and regularly.
In 1971, the US abandoned the gold standard that allowed converting notes and coins for gold. Today, all the currencies are fiat currencies, the declared legal tender by the government, and do not have any intrinsic or field value.
Any tangible assets do not back paper currencies. The key difference between yellow metal and paper currency is that there is no physical limit on the supply of paper notes. The government can add it anytime, even without having a backup to support its value.
The value shows the buyers have faith in the economy offering the currency. Still, when the country faces economic downturns or suffers from economic mismanagement, political upheaval, or civil crisis, the currency value declines in the global markets.
Market analysts believe the current economic issues and struggling banking sector may find it difficult to remain profitable when the interest rates are low, and this has been helping gold prices.
Recently, Buffet bought shares in the gold miner Barrick Gold and sold shares in some bank stocks. He is known for taking short-term opportunities. In 1997, he had similarly invested in silver and expected to generate cash flow through such opportunities.
Putting all their money in stocks can be a bad idea for investors. Every investor should diversify and prepare for emergencies. Gold price tends to increase when the markets decline.
Most investors who buy it have a long-term perspective where they gain value from inflation. Since inflation has risen considerably in the last 50 years, its value continues to increase.
Some investors diversify when government bond yields are low or alternative offers become risky.
Bonds have a role in diversification, and one can invest in some retirement plans. Bond prices grow when the interest rates and economic growth are low. It is like insurance against volatile markets and economic conditions.
The Federal Reserve balance sheet continues expanding, and the government debt continuously increases. It is expected that easy money and debt will cause uncurbed inflation.
However, the yellow metal continues to be a speculative asset, and there can be a huge swing in price at times. Most institutional buyers allocate in the range of 2 to 5 per cent to it.
Gold is not the rarest metal; instead, platinum is rarer. But it is hard to find and extract it in large quantities.
Most of the gold and silver found in the Earth's crust are alloyed with other metals and compounds, and the process of separation of pure metal makes it expensive.
The metal is corrosion-resistant and is considered to be highly desirable as it is used for decorative purposes. The rarest form of the yellow metal is the Ram's Horn, which was found in 1887 at a Colorado goldmine. It is 4.7 a 4.7-inch piece of gold that weighs roughly half a pound.
It is split into three curling tendrils, and it represents the rarest forms that formed part of the mineral collection at Harvard University's Mineralogical and Geological Museum.
In historical times, uncontrolled inflation and high-interest rates with a controlled mining operation led to a rise in the price of gold and a decline in the dollar.
Now, the governments are holding rates at a low and allowing inflation to run above the target to help recover and reduce the debt burden. This means the interest rates after inflation is expected to remain low or negative for some time, supporting growth in precious metals.
Gold remains uncorrelated to markets, and it can be used during the crisis as it retains and gains during the economic crisis, but investors should be careful as the price hits the £2,000 mark. However, it is still below the inflation-adjusted peaks in 1980, which equals $2,200, compared to today's conditions, where the current supportive environment helps it rally. It would not be surprising if the level is crossed soon.
While there is a chance of further growth, investors should be aware of and change expectations with changes like a strong economic environment, and higher interest rates can lead to a decline in prices.
The chart of gold shows there have been certain phases in the economic history of the planet when the value of yellow metal increased significantly.
When it was untethered to the US dollar in 1971, the metal price increased 40 times, although its value also increased 40 times in 2011.
The price inflation data finds the consumer price index increased sixfold in the last 50 years and depicts how inflation can erode buyer purchasing power over long periods.
Gold and silver are great diversifiers and are not correlated like bonds or shares, but there are certain drawbacks as it has little practical use and gives no income.
In normal economic conditions, it can become ineffective in the portfolio. In certain cases, the unpredictability of market factors can lead to demand imbalance or change the geopolitical factors, which can hit the price.
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