Is gold a good investment? (Part 2)

Inflation and gold

Additionally, gold can also be held as a hedge against inflation.

Central bankers can (and do) sometimes print money to try and spend their way out of trouble. As the amount of gold available is finite, even if the money supply increases ten-fold, so should the price of gold.

Speculation

Gold’s role as a hedge and for managing risk has ironically led to it being traded for purely speculative reasons.

Aware of all the hedging going on, another group of traders can use gold as a measure of how the forces of ‘greed and fear’ are playing out in the markets.

You don’t have to be looking to hedge risk to see gold as a good investment you just need to have an opinion on the direction the price is heading.

During the global financial crisis of 2007, the price of gold almost doubled in value in the space of only two years. This price spike was driven by fundamental investors putting on gold hedges but also by others spotting that trend and looking to buy early and benefit from the scramble to ‘safer’ assets.

The intrinsic value of gold over thousands of years and historical price data broadly point to gold prices being inversely correlated to other asset groups. However, the market meltdown of March 2020 led some to question the role of gold as a hedge. At one point, gold followed the rest of the market into freefall. That illustrates how the gold market remains an important feature of the financial ecosystem.

Reprinted from eToro, the copyright all reserved by the original author.