According to Bloomberg, yellow metal is one of the most profitable assets in 2020. For the first time in history, his rate exceeded the mark of $2,000 per ounce. The yield on the asset reached 25.1% for the year, becoming the highest in the last decade.
Yellow metal has been popular since ancient times, being an indicator of wealth and the main means of exchange. The attractiveness of gold remains high until now. The yellow metal plays a fundamental role in the investment portfolio, namely, diversifying risks in the face of economic instability. In addition, it is a means of hedging inflation and foreign exchange risks. It is enough to analyze the events of 2020 to understand why gold has become an object of attention from a large number of investors.
According to the World Gold Council, the demand for shares of gold exchange funds was especially high in 2020, reaching a record 877 tons. Investors treated the yellow metal as a safe means of saving at the beginning of the pandemic, which caused a slowdown in the world economy. In the first quarter of 2021, gold quotes decreased by 10% to $1,708 per troy ounce. The drop in quotes during the first quarter is a consequence of the growth of nominal and real yields of US Treasury bonds, which contributed to the strengthening of the US currency. The decrease in demand was due to an increase in investor interest in riskier assets - stocks and bonds. The popularity of risky assets is explained by mass vaccination against coronavirus and an improvement in the growth prospects of the global economy.
Gold Supply and Demand
Investors usually pay attention to the relationship of gold with the US dollar, inflation, interest rates and expectations of economic growth. However, in the end, the price of yellow metal, like any product, is determined by demand and supply.
At the moment, the situation with the supply of gold (mining and processing) is relatively stable. However, the reserves of precious metal in the bowels of the earth are limited.
To determine the level of demand for yellow metal, you need to consider the factors that affect its price. Most investors use gold as a means of protecting against the effects of rising inflation and the risks of a deterioration in the world economy. Gold is unique in that it does not generate short-term returns, unlike stocks or fixed-income assets. Interest rates are another key factor affecting the price of yellow metal, as alternative gold storage costs depend on it. Investors suspend investments in precious metal as interest rates rise, and begin to look for more profitable sources of profit.
Prospects for gold as an asset
Now the global economy has stabilized, as leading countries have begun to recover from the effects of the coronacrisis thanks to financial and monetary incentives, as well as mass vaccination. Current reflation increases expectations of rising interest rates. Positive earnings reports from American companies and rising rates in the United States will lead to an improvement in the overall economic situation, which will put downward pressure on yellow metal quotes. Prospects for improved business activity reduce the attractiveness of assets such as gold. According to the Fed, inflation growth will be low, so investors do not consider it necessary to acquire protective assets.
However, the situation with gold can be looked at in a broader context. The soft monetary policy of the US central bank and the large costs of stimulating the economy may increase inflation. Economic growth will lead to a significant depreciation of paper currencies, so there is a possibility of higher gold prices. Rising bond yields could reduce fiscal stimulus, which would support gold. Precious metal quotes will increase, because this asset is considered a means of insurance against geopolitical risks.
In the long run, gold generates revenue, which can be compared with leading investment assets. In addition, the precious metal market is quite large and liquid.
There are several ways to invest in yellow metal:
1. Purchase of investment coins.
2. Buying jewelry.
3. Investment in gold-backed exchange products.
4. Purchase of shares of extractive companies.
The most reliable and effective way to invest in physical gold is to buy investment coins.
Gold is a diversification tool that reduces losses in the face of market volatility and geopolitical shocks, and also hedges inflation and currency risks. Yellow metal is a defense against geopolitical risks. The combination of these qualities in gold leads to an increase in portfolio profitability, adjusted for risk.