FOR more than 4,000 years, in times of crisis people bought gold. Whenever other financial investments crashed, the price of gold rose. There has always been some comfort in converting your wealth into gold coins, chains, bracelets or rings, allowing it to be taken with you in times of dislocation.
One of the surprising aspects of the current global economic crisis is that this has not not happened - in fact, gold prices have fallen by as much as 20%.
Why is this? Two main reasons - (1) unlike other financial assets (e.g shares and dividends, bonds and yearly interest) gold does not pay an income; (2) it has been affected by the strength of the US dollar against other currencies.
Most demand for gold comes from countries who do not have the US dollar as their currency. Since gold is priced in US dollars, when the USD gets stronger is value, an investor would have to pay more of their currency to buy gold. On the other hand, the strong dollar makes it attractive to put money into the US economy. The dollar can be expected to do even better over the next few months as more investors look to put their money into it. Also, US interest rates are relatively high. Therefore, buying US government bonds at 3 or 4% rate of interest is a safe and relatively high return investment, when compared to something like gold.
Full article:
****Bonus Fun Fact: all of gold in the world would fit into the space of an Olympic sized swimming pool!
No comments:
Post a Comment