A rise in the price of gold could be a signal that the economy is struggling. As a result, in times of crisis or inflation, many investors turn to gold to protect their capital. Traditionally yes, the price of gold tends upwards when inflation lowers the value of the currency. Gold develops in this way in reverse to market conditions, but that is not always the case
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Gold can be just as vulnerable as the stock market if investors choose not to look for it. This, too, is the product of the fact that the value of something is largely based on social perception and popularity. If we all woke up tomorrow and decided that gold was worthless, the price would fall. It is not binding as it is not a contract. It’s more of a gentleman’s agreement, but one that is in the interest of central banks, as bringing too much gold onto the market at once would have a negative impact on their portfolios
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However, gold is also characterized by the fact that it is relatively uncorrelated with other important assets. Sometimes it benefits from market volatility and sometimes, along with other commodities, it loses ground in times of extreme volatility. That’s not to say that the price of gold doesn’t usually rise during inflation, just that this isn’t a fixed fact. Despite market lore that gold is a good hedge against inflation, the reality is much more mixed, meaning that the two are essentially uncorrelated. This exposes gold as a dead commodity, where gold, when an extreme risk aversion reaches the markets, can fall along with other commodities as investors try to cash out of commodity stocks and get onto safer ground,
such as gold stands out as a seemingly distinct type of commodity among commodities, and there are actually many distinguishing features between gold and other commodities. These are gold mining companies and providers that are publicly traded, and the ETFs have a positive correlation with the price of gold. Despite its lack of practical uses that go beyond aesthetics, gold has been a valuable precious metal for centuries, dating back as far as 550 B. Remember that gold is a commodity and should be considered as such, meaning that gold often tracks wider commodity indices rather than deviating significantly from the overall
commodity market.
Now that you understand that gold is a store of value, you may be wondering how the price of gold reacts to various economic conditions. Especially given gold’s tendency to trade counterintuitively, it’s best to keep it to a small allocation in an overall portfolio, such as 5%. Although countries like India and China treat gold as a store of value, the people who buy it there don’t trade it regularly (only a few pay for a washing machine, such as handing out a gold bracelet). A few factors affect the supply of gold on the wider market, and gold is a global commodity market,
such as oil or coffee.
In addition to central banks, exchange-traded funds (ETFs) such as SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), which enable investors to buy gold without buying mining stocks, are now major gold buyers and sellers. The problem for central banks is that the other investors out there aren’t as interested in gold right now. Interest rates have a significant reverse effect on the price of gold over the long term, as can be seen in the chart above.
