Monday, 11 January 2016

Looking Ahead into 2016 - Gold Versus Global Currencies

Gold as an asset class holds tremendous opportune moments for investors in the present year.  The Federal Reserve in its effort to normalise interest rates by bringing about a minor increase of 0.25 % is in all likelihood (if not reversed) going to have it witness a steady rise in 2016.

The US dollar, shares an  inversely proportional relationship with gold and real interest rates, as both are priced in dollars. Real Interest rates have an impact on the yellow metal in a big way.

In 2011 when gold was at an all-time low of $1900 per ounce, real interest rates were also showing a negative 3 %. In other words, if you bought a treasury investment you lost a 3 %  showing real interest rates in the negative.

Since gold does not cost to hold, it is an attractive long term investment. Quantitative Easing Programmes seem to be falling short of expectations in the European stock market,compelling investors to stay with gold for long term investment.

Investors everywhere understand that lower interest rates, higher taxation and regulations are leading to a global slowdown. They are absorbing the fact that the market, to move ahead, would need fewer taxes, tariffs and regulations. Smarter fiscal policies seem to be the answer to market woes, according to them.

Growth seems to be slow, globally and M 2 money supply a trickle in the US; both these have to improve, if commodity and market investments are to get a facelift in 2016 and ahead.


Looking at 2016 we are hopeful that the volume of trade and money supply would improve, in order to uplift the commodity bazaar and market investments, as well.

Gold on the other hand seems to be witnessing an all-time high in both China and Russia. Each of these countries making a determined bid to trying and strengthen their own currencies as against the American dollar.

Gold and the Role of Monetary Bodies (Central Banks) 

Monetary authorities have all over the world kept gold in their reserves. Countries do the same and there are good reasons for it. These motivations are acknowledged by Central Banks themselves. Although factors those different central banks highlight & emphasize on as important, may be different.

Some of the important points raised by Central banks for gold being kept in reserve by countries and monetary bodies  include: diversification, physical and economic security, confidence, income &  insurance.

Diversification properties in a currency portfolio are the result of gold’s presence in it. These originate from the fact that the value of gold is determined by the supply and demand ratio of gold in the world markets; unlike currencies and sovereign debt securities which are dependent on government promises as well as variations in the monetary policies of the central bank. This is the reason why the price of gold behaves differently from the price of currency or the exchange rates between currencies.

According to the Central banks gold is a commodity that over the years has maintained its real purchasing potential and therefore is suited to form a part of the bank reserves and provide a stable economic buffer in times of economic destabilization.

In the face of asset freezes or imposition of exchange controls, foreign securities become vulnerable; however, if suitably positioned at a convenient location (physical security) gold remains much less vulnerable. Reserves are meant for emergency uses; therefore, gold is the proven choice for it is less susceptible as it provides total and inconvertible liquidity.

Gold is the reserve asset against an unknown future, an insurance against the unlikely happenings, alarming & detrimental events.

Gold as the reserve commodity with governments provides a tremendous boost to a nation's confidence, for they take great comfort in knowing that the government holds gold.

A great source of income gold has a lending market globally and can also be traded prudently to make it a profitable venture.

The yellow metal's holding period can be viewed as an insurance premium which would finally result in a claim in the form of a sale.

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