Question

During the financial crisis and afterwards, gold prices skyrocketed. Discuss why gold prices changed. Is gold always a good investment in uncertain times?

If you are able to include some scholarly sources etc... that would be greatly appreciated. I need ~ 1 paragraph of information, I'm unsure exactly what effects gold.

Answer 1

Gold - a Gist

Gold is one of the most popular forms of investment in asset class. It is and easily accessible asset for investment. However it is to be noted that Gold is a conservative investment and is initially given less importance while allocation in portfolio. The returns aren't high as equity alternative. It is useful for Hedging against uncertain times as prices tend to move greatly from their mean.

Financial Crisis and Gold

The Global Financial Crisis, 2008 was a Black Swan Event mainly due to housing bubble. From the very moment, the economy started heading for downturn in 2008. Investors were failed by their investment s in equities, real estate, There was a need to cut and mitigate losses and move to a more secure asset. The demand started to surge not only in United States of America and globally as well. It was a time of Global Recession. It was just the start and two years after this crisis, we faced The European Crisis which took place due to High Debt Countries (also known as PIIGS) defaulted in their sovereign repayments. So, as and when crisis occur one can see a surge or an upward movement in the gold prices.

Factors affecting the prices of Gold

1. Market Forces: The market forces such as demand and supply plays a major role in gold prices. The demand for gold has increased from 3150 metric tonnes in 2008 to 4345 metric tonnes in 2018. In many developing countries, purchases are made by household for both investments and in the form of ornaments.

2. Basic Investment: Unlike other forms of investment like shares, debt funds, Exchange traded funds and even land, buying and retaining gold as a form of asset is much easier. Please Note that in many countries rural population still invests in gold rather than other financial instruments.

3. Geo-Political Factor: Actually this point is more about investor's perception about gold during the occurrence of crisis. For example, the housing bubble can also lead to a rise in god prices. Geo-Political tensions can lead to investors being pessimistic on other forms of investment and allocate more money to gold.

4. Movement of Currencies: Gold especially International Gold is denominated in US dollars. If there is negative movement in US dollars, it leads to the rise in price of gold. This explains how the prices were impacted so drastically during the Global Meltdown in 2008.

5. Hedging of Portfolio: Gold is an effective instrument to hedge yourself against volatility during an uncertain event. Even for an individual who maintain a well diversified portfolio can alter the composition of gold by increasing during uncertain times like high probability of a crisis, war or any event that can negatively affect the economy of the country or global economy.

6. Inflationary Pressure: Inflation is country is dealt by the Central Bank of the country. The Central Bank adjusts their interest rates like levers to control inflation. However the inflation takes place as the country experiences growth. This raises the prices of goods and services. It is a perfect condition to buy gold during this phase Therefore with the rise in inflation the gold prices rises as well.

Is Gold always a good investment in uncertain times?

"Absolutely", "Yes"

One needs to have some proportion of gold with them and accordingly alter that proportion. It may not be only useful to invest in uncertain times but in general as well. Gold is bought by people for many reasons apart from just investment. There will always be a great demand for gold. Uncertainty is always there due to globalization. Anything that takes place in other countries can show its effects in some point of time in the home country as our economies are connected.

I hope to have answered to your Question.