Gold has always been desired for its rarity as a precious metal with limited supply, it is seen as a stable store of value. Fundamentally speaking, its high value has been justified by its attractiveness and its usefulness. It is highly malleable, and conducts electricity, giving rise to many industrial uses, and its usage for visual appeal such as jewelry.
Gold has been around for thousands of years and has been used as a form of currency with the first gold coin minted as early as 550 BC. However, the adoption of the Gold standard took place in the late 1800s. That is when it cemented its value in modern-day finance, and most major nations fixed the value of their currency to the gold price.
During the 1930s some countries abandoned the gold standard, this happened in 1931 in the UK and 1933 in the US. The gold standard was readopted at the famous Bretton woods agreement to help with economic stability and the price of gold remained pegged below $200 an ounce. A few decades later, the Gold standard was abandoned entirely in 1971, allowing currencies to move freely against each other.
Gold has historically been viewed as a stable store of value for thousands of years. It has maintained its value over time against a variety of risks such as:
Gold plays an important diversification role in a portfolio, the chart displays gold vs S&P 500 price movement since the 1970s, clearly showing the inverse relationship, and its outperformance particularly during depressed periods, including the recession in the 70s, and during the 2008 financial crisis.
Gold has a significant negative relationship with real interest rates which are adjusted to remove the effects of inflation. Real interest rates are one of the most important drivers of gold prices, as you can see when the real interest rate is zero or negative, gold prices increase sharply. Gold is seen as a store of value during times of persistent or extreme inflation, as it protects global purchasing power.
Interest rates and gold typically have a negative relationship, and particularly when central banks are trying to control inflation. gold is perceived as offering protection against inflation so central banks may increase interest rates in response which will weigh down on gold prices.2. STRONG US DOLLAR
Gold is predominantly valued in dollars, and if the dollar is strong, it typically costs more for international investors to buy, therefore demand might fall.3. GOLD PRODUCTION
An oversupply of gold can weigh down on the price of gold, just like any other commodity i.e., crude oil.4. GROWING NEED FOR INCOME
During period of low interest rate environments, investors and traders look for alternative higher yielding investments such as equity. Gold provides no source of cashflow nor income, which may lead to a drop in price.
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