With Gold showing relative strength during this week’s risk off, we would like you to remind the real reasons behind buying Gold. Courtesy SK Options.
Gold serves numerous functions as an investment. Traditional reasons for investing in gold include:
- Investment market declines
- Burgeoning national debt
- Currency failure
- War or other extreme events
- Social unrest
Some would argue these entire phenomenon are related. For instance investment market declines can lead to war which can be followed by inflation which can lead to currency failure – just look to Germany in the 1920s for proof of this (albeit in a mixed order of events).
Basically, gold is protection against various ugly or undesirable societal, political, economic and financial occurrences. That reasoning broadly explains gold’s rise from $650 in 2007 to approximately $1800 today. Gold has risen over the last few years on the back of uncertainty and weakness in major global economies.
But of all the reasons given to invest in gold, the most common traditionally and the one we hear most often is protection against inflation. Inflation is often a consequence of increases in the supply of money that don’t coincide with an increase in the output of goods and services – basically, higher prices as a result of excess money competing for a fixed number of goods.