Why Doesn’t Gold Glitter These Days?

Gold has been considered a store of wealth since ancient times. It is beautiful, malleable, and scarce – all qualities that would have made it appealing to both potentate and subject alike. Its beauty malleability allowed it to be used for jewelry and gilt, while its scarcity made it a valuable currency – first as coinage, later as backing for currency. In modern times, it no longer backs currencies but is instead considered a store of wealth that provides a valuable hedge against inflation. Why then, if inflationary fears are percolating, is gold a relatively stagnant investment?

The logic for gold as an inflation hedge is sound. The currency of an inflationary economy is experiencing reduced purchasing power. In other words, it requires more currency to buy the same amount of goods. A gold bar or coin contains a fixed amount of metal and is generally fungible. In theory, that metal will appreciate in local currency terms as the purchasing power of that currency decreases. That works spectacularly well in countries that are forced to borrow in currencies other than their own. The foreign currency borrowing makes them subject to periodic devaluations, which makes gold a wonderful hedge against currency depreciation. 

For most investors in G-7 countries, however, that problem is seemingly eliminated. They can borrow in their own currencies. While their currencies are subject to fluctuation, they rarely find themselves in the midst of a currency crisis. We must ask ourselves then, what does gold buy an investor who lives in a country with low inflation and a stable economy?

Right now, not much – at least on the inflation front. We have seen industrial commodity metals like copper and aluminum rising over the past few months as the world’s economies rebound, or at least expect a rebound. While gold is also an excellent electrical conductor, its scarcity and use as a store of wealth work against the yellow metal in this regard. Demand may be picking up for many useful metals, but gold is less useful than most.No one is going to wire a building with gold in lieu of copper. It’s simply too expensive. 

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Disclosure: FOREX

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. ...

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