We have already told you much about gold, I guess. Be it alternatives of gold or earning a fixed income out of gold through SGB. But one thing remains undiscussed (to the layman) that is 'WHY GOLD?' (Not talking about jewelry)
Before I answer WHY GOLD?
I want you to understand WHAT IS GOLD.
WHAT IS GOLD?
Yes, you read it right, WHAT IS GOLD?
Now you must be thinking that you already know what is gold. Yes, we all know what it is basically but there's something which is not known by many of us.
Before I actually tell you more about WHAT IS GOLD, let's have a look at some numbers & graphs first. (Don't worry it's going to be extremely simple)
Chart 1: Gold Price (USD)
20 years CAGR of 10.28%
(I assume you already know by now what is CAGR — Compounded Annual Growth Rate. For those who don't know, simply it's a yearly average growth rate.)
Chart 2: Gold Price in India (INR)
20 years CAGR at 12.97%
We know the published gold price is the international price of gold (excluding taxes & duties). Then why the heck gold prices in India are moving faster than the international price of gold?
That's because of different currencies.
5 years ago 1UDS = 65INR (approx)
Now it is 1USD = 73INR (approx)
So the value of gold increased & the value of USD against INR also increased.
Now let's jump into the main portion of this article.
GOLD'S GOLDEN HISTORY
Do you know that the value of any currency was determined by the value of gold it is backed by? Read it again, slowly.
To be more specific whenever the central bank of any Country decides to print currency notes, it keeps the equal amount of that gold as a reserve.
For example, if RBI prints ₹2000 note, it will put that much amount of gold in its reserves. So the value of the currency was backed by gold.
What I just told you is a piece of history. It was used to be done a few decades ago but now it's not like that.
The point I'm trying to make here is GOLD USED TO BE AN ULTIMATE CURRENCY.
So now you know its significance.
But that was the past. How is it practical today?
Well now the currencies are not backed by gold but they are backed by the Central Banks' as well as the government's promise. Let's not go deeper into that, I know you are being curious about it.
So now the essence of any currency is its regulator's power and the power of any regulator is affected by an end number of things so what if people don't trust the regulator & it's power? That's where the gold makes wild card entry. People buy gold when they feel uncertain about the situation.
Because currency might lost its value but gold doesn't.
Long story short,
Gold still is the ultimate currency.
WHY DO WE GO TO GOLD?
Whenever there will be a time of uncertainty in the world, Gold will shine brighter.
Take the recent example of Covid-19 Pandemic, more the uncertainty more the value of gold.
Just like any other Investment, gold is bought in anticipation. People anticipate that other Investment will not perform well due to adversity & the only alternative remains is GOLD.
To back my words I'm showing you this historical as well as insightful chart of SENSEX vs GOLD.
Whenever the blue line (Sensex) is falling down, the yellow line (gold) is going upwards.
The downside of SENSEX or Stock Market shows the falling confidence of Investors into business development, it shows the falling anticipation in 'business & economic activities'. There are lots of factors that trigger the stock market fall (I'm not talking about day-to-day ups & downs). Major factors are declining business activities & falling demand.
Falling demand means less expansion of businesses, lesser number of economic activities and lesser capital borrowing. It all leads to falling in borrowing rates. Have you noticed that recently due to the covid-19 situation loans are available at a much cheaper rate compared to before Covid-19. It happened because very few people were borrowing money. That means the banks won't earn much if nobody's borrowing so what it will do is provide lesser interest on deposits. So even bank deposits are not an attractive side. To be on safer side yellow metal or The Ultimate Currency emerges as the best alternative.
That is it from my side. I know there's a lot of grey area around this topic yet & you are curious to know all the stuff. We shall discuss it in the next article maybe because it's really a complex topic to make you understand through written content.
Why don't you drop your questions in the comments section below & in the next blog I will try to answer them.
Let me know what would you like to understand & what shall be my next article about. Till then.
(Disclaimer: This article carries the purpose of education. Don't make investment decisions based on this article. Always consult with your advisor before investing.)
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