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Gold Market Behavior Compared to Other Financial Assets

October 11, 2011

gold investingThe worldwide gold price rose 29% during the 2010 calendar year, and since January of 2011 gold has continued its steadily upward climb, reaching over $1,600 per troy ounce in August.  Much of this dramatic increase can be linked to investor fears that the current economic climate in developed nations such as the United States may lead sovereign governments to print their way out of heavy debt loads.  This would destroy much of the value of investments held in currency.

The Demand for Hard Assets

Certain assets have traditionally been a hedge against fears of high inflation making the contents of a bank account nearly worthless.  These “hard assets” – such as gold – are believed to be a bulwark against inflation for two reasons.  First, as the price of everything increases, their price also increases.  Second, hard assets are much less susceptible to manipulation than many other forms of investment.  In theory, hard assets should increase in value at a rate that at least equals the rate of inflation.  In actual practice, however, gains are often greater than the inflation rate.

This extra gain results from the forces of supply and demand.  As it is well-known that hard assets are more likely to keep their value than many other kinds of investments, whenever the economy appears precarious, many investors choose to sell off stocks and bonds in order to free up capital they can use to purchase hard assets.  Hard assets are priced according to market forces; when they are in high demand, their price rises accordingly.

This additional factor merely tends to increase demand levels, since it makes hard assets seem all the more safe during times when investors are reacting to fears of runaway inflation.

Alternative Financial Assets to Consider

Gold, silver and platinum are usually the most popular hard assets.  Land is popular as well, although to a more limited extent since local changes in zoning regulations can render land unable to be developed, which will destroy much of its value to potential buyers.  Investing in gold or other precious metals has an additional advantage over other investments in that metals can be held directly if the purchaser so desires.  Those who buy gold online can transfer it to physical vaults or withdraw it completely.

From derivatives to shares of stock, many of today’s investments are strictly electronic in nature, but when times appear precarious, investors sometimes want true value that they can literally hold in the palm of their hand.

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