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sara Kunju made post

Why exactly are investors drawn to gold as an asset class in recent times?

Answer
user profile image
1 year ago


Diversification could be one of the major reasons for the demand for gold. Investors are often drawn to gold’s role as a diversifier – due to its low correlation to most mainstream assets – and as a hedge against systemic market risk and strong stock market pullbacks. Some investors also use gold as a store of wealth and as an inflation and currency hedge, especially when currencies get extremely volatile. As a strategic allocation in your portfolio gold has historically improved the risk-adjusted returns of portfolios, delivering returns while reducing losses and providing liquidity to meet liabilities in times of market stress.

Gold can also be an important source of returns. Gold is not only useful in periods of higher uncertainty. Its price has increased by an average of 10% per year since 1971 when gold began to be freely traded following the collapse of Bretton Woods. One can argue that most of the returns came in a span of 15 years during this 50 year period but that is true of most asset classes. And gold’s long-term returns have been comparable to stocks and higher than bonds or commodities. There is a good reason behind gold’s price performance: it trades in a large and liquid market, yet it is scarce. One also needs to remember that mine production has increased by an average of 1.4% per year for the past 20 years. At the same time consumers, investors and central banks have all contributed to higher demand. Where does the demand come from? On the consumer side, the combined share of global gold demand from India and China grew from 25% in the early 1990s to more than 50% in recent years. They are the key drivers of consumer demand for gold. In fact, the expansion of wealth in these nations and the rising middle class in both the countries is one of the most important drivers of gold demand over the long run. It has had a positive effect on jewellery, technology, and bar and coin demand.


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user profile image
1 year ago


Gold is an asset with almost zero depreciation value based over time. Quick liquidity is another advantage.

If you buy today, it will be as useful even 10 years down the line. In 2009 it was around the 14K mark, now it is above 31K.