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CONCEPT – GOLD AS AN ASSET
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- Tangible and intangible assets : The term "real assets" refers to investments that are tangible (physical) and not notional or non-physical (stocks, bonds, etc.)
- Gold as a tangible, real asset : For centuries, investors worldwide have seen gold as a great store of value, and a safe investments. Whenever markets panic, people purchase more gold, pushing its prices up!
- A bet against inflation : Gold is considered a good inflation hedge and during times of inflation the price tends to rise. But gold can experience long periods of slow gains, and some short spurts in value. But it does not generate any cash.
- How to purchase gold :
- We can go out and buy physical gold in the form of bullion or gold coins. The need to safely store it is a big minus point.
- We can purchase shares in an exchange traded fund (ETF) that tracks the price of gold. This provides exposure to the price of gold without the necessity of storing it. Gold exchange-traded products may include exchange-traded funds (ETFs), exchange-traded notes (ETNs), and closed-end funds (CEFs), which are traded like shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities was launched in March 2003 on the Australian Stock Exchange, and originally represented exactly 0.1 troy ounces (3.1 g) of gold.
- We can purchase gold futures or options on gold.
- We can purchase the shares of companies involved in the gold industry.
- Collectibles : We can by "Collectibles", made of silver, jewelry, art, or even stamps and comic books can all be considered real assets. Many of these assets may act as a store of value and provide safety to an investor's portfolio while holding the potential for capital gains.
- India and China : Gold purchases by people in India and China are soaring, and the two are 52% of all gold demand, vs. just 25% a few years ago. In the western world, the gold-holdings of the ETFs are locking up gold supplies. For example, the SPDR Gold Shares (GLD) now holds 1,200 tons of gold, stored in England. The more the buying of GLD and other ETFs increases, the more gold will be taken off of the market, i.e., the shortages increase. Secured storage facilities are running out of space. New facilities are hurriedly being built.
- Gold and interest rates : It is generally accepted that the price of gold is closely related to interest rates. As interest rates rise, the general tendency is for the gold price, which earns no interest, to fall, and vice versa. As a result, the gold price can be closely correlated to central banks[clarification needed] via their monetary policy decisions on interest rates. For example, if market signals indicate the possibility of prolonged inflation, central banks may decide to raise interest rates, which could reduce the price of gold. But this does not always happen: after the European Central Bank raised its interest rate slightly on April 7, 2011, for the first time since 2008, the price of gold drove higher, and hit a new high one day later.
- Gold was once used to back up fiat currencies : As early as the Byzantine Empire, gold was used to support fiat currencies – that is, those considered legal tender in their nation of origin. Gold was also used as the world reserve currency up through most of the 20th century; the United States used the gold standard until 1971 when President Nixon discontinued it.
- The price of gold affects countries that import and export it : The value of a nation's currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.
- Gold purchases tend to reduce the value of the currency used to purchase it : When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency. (The metal's rich history stems from its ability to maintain value over the long term.
- Gold prices are often used to measure the value of a local currency : Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
- Summary : Gold has a deep impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies.
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