Gold is the currency of last resort but it's a bit of a mystery why?

01-Aug-2020, Surat

Aside from its role as metal, gold is one of the oldest mean of exchanges. We can call gold has a dual role as both commodity and currency. Gold is an asset as such it has intrinsic value. Anyway, this value can fluctuate over the time. Sometimes in a volatile fashion. The price of gold skyrocketing to an all-time high at the 1980$ last Monday. Woes between US-China trade & political tantrum, low-interest rate & growing concerns in investors shelf(Portfolio) from the current Coronavirus pandemic. Read More...

Interest rate and Gold has an inverse relation

Global interest rates are unidirectionally headed southwards. It is a change of regime that will affect the way we look at both equity and debt. Time to reset expectations.

• 23 countries have less than 1% interest rate
• 22 Countries keep interest rate between 1 to 3%
• and 15 countries follow less than 4%

Japan, Denmark, and Switzerland have negative(-ve) interest rates while 22 countries now are in the Zero Interest Rate Policy(ZIRP) regime.

The global awakening regarding unbacked Fiat currency is starting to begin. Real concerns around the longevity of the U$ dollar as a reserve currency have started to emerge.

The following charts show the Gold Future price (in$) with comparing Dollar Future Index(DFI) daily chart pattern. Dollar falls lower level by the last 2 years while Gold and silver surged more than 40%. As a rule when value of Dollar increases relative to other currencies the price of gold tends to fall in dollar term and a vice-a-versa. As we can see here dollar moves lower, gold tends to appreciate as it becomes cheaper in other currencies( $ to Rs. term)

 

https://invst.ly/rlz4e

The traditional argument is rising yields are bad for gold. If we invest in gold, we are not getting any interest. (But in India, Indian Residence can invest in Gold via Sovereign Gold Bond/s and receive 2.5% PA interest on initial gold investment) The alternative of holding your wealth is in saving accounts or in low-risk bonds which will give you interest.  If we look at the year 2000, gold was increasing steadily while US 10-Year Treasury yield was decreasing. However, in last 10 years, the correlation between two assets has become stronger.

https://invst.ly/rlzlv

WGC(World Gold Council) estimates that India owns almost 25000 tonnes Gold. This perhaps represents the largest stock of gold on earth, translates to 13% of the total gold(195k T) mined since the beginning of civilization. In fiat currency terms the value of this gold-stock equals 1.55 trillion dollar i.e. more than 50% of India’s GDP. This equates to 80% of the total market capitalization of all listed entities on BSE- Bombay Stock Exchange $ more than 34% of total deposits placed with banks.

The economy is in doldrum by the last 2 years in this prevailed paralysis of economic mean gold is massive wealth creation at a consolidated cushion.  Rural India, where mainstream financial products have been inaccessible, has a much higher proportion of people owning gold compared to urban India(Read Gold Consumption report) 

Why gold gleams is a Mystery for calling it currency.

Gold will never replace Fiat currency and has no potential to do so even we call third world war because Fiat currency would be weak but as it is more convenient to carry the transaction that gold cant make the sense. Read the Blockchain Technology and Bitcoin, Yes Bitcoin dance together Gold gleam)

Gold is usually seen as a safe haven when stocks are falling or when inflation is rising. Neither of those two things is happening right now. More than 30% surge in gold nervous investors were looking for safe havens to park their money in gold. When adjusted for inflation, gold prices were actually higher in Sep-2011. Prices peaked back then before later losing one-third of their value by Dec-2013. To adjust this inflation since 2011-13 Gold Rush rally, gold would have rise another 10% or 200$ or at 2150$(Which shows in Fibonacci Retrenchment)

Here is a real problem

If Had you fell for the lustre of gold in 1980, when it was selling for 1300 Rs. (590$), it would have taken you 25 years to get your money back, in 2005, in nominal terms. In real terms, the value of every ounce of your gold would have plunged to 450 Rs (207$). So much for gold being a hedge against inflation. & in the meantime, your gold would have received zero income – although you may well have run up a large bill for a bank safety deposit box in which to keep it.

We call Gold safe haven but not at all; since its value has been decoupled from that of currencies because the currency has an association with real term inflation rate and if we adjust for gold it would be a zero-sum game. Gold has become a short-term speculative investment on which it is possible to make a lot of money in a short time during periods of financial upheaval. You could have quadrupled your money, for example, between 2008 and 2011, and increased it more than tenfold over the course of the 1970s. But the flipside of that is that gold tends to plummet when economic stability returns. Its value won’t disappear to nothing, but it has acquired a habit of drifting downwards in value for longer periods than just about any other asset. 

There should be no mystery by this gold gleams. Around all, just a lump of metal of some utility in the electronics(manufacturing Chips) $ dentistry(teeth) industries, in making medicines and also for utensils but a generally gold remain unproductive asset like your ornaments have no role of appreciation of assets other than price change and its associate costs. In good times, when other assets are going gangbusters, it has very limited appeal. Buy gold only if you think( not only think but check the fundamentals of the economy also) economy is going to go even further plummet(down) the pan over the next year/s. and the other side finds the best instruments you may have to choose to load your investments back by this gold. doing hedge your other investments, you insure your wealth against erosion in value. Unless economy and prosperity are well & truly doomed, gold is going to go out of fashion, & possibly extremely quickly as money pours back into productive assets.

You can find here some types of gold investment, this simplified reach you to perfect decision on gold buy.

Sovereign gold bond scheme

Gold's market returns + Fixed 2.5% per year on invested amount. Guaranteed by Government of India*.

Capital gain tax arising on redemption of SGB to an individual exempted.#Gold #M10M

— 𝔻𝕖𝕤𝕒𝕚 (@iJigneshDesai) August 3, 2020

**Image courtesy -@IjigneshDesai #M10M

***Disclaimer- Facts and figures are derived from else, whereas views expressed in this article are purely personal and not mean for any plagiarism. @Ijigneshdesai **copyrights