GoldGOLD IS AN ASSET THAT IS BOTH A COMMODITY and a financial instrument at the same time. Unlike other commodities or financial assets, the value and importance of gold have survived over thousands of years. The effects of global economic growth, the weakened dollar, the credit crunch, and the recent creation of enormous funds, all influence the gold market. Put them together and they add up to potential profits that gold investors have never before dreamed of.

Today, like most commodities, the price of gold is driven by supply and demand, including demand for speculation. However, unlike most other commodities, saving and disposal play a larger role in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewellery, with little value over its fine weight — and is thus potentially able to come back onto the gold market for the right price.

According to the World Gold Council, the annual mine production of gold over the last few years has totalled close to 2,500 tonnes. About 80 per cent goes into jewellery or industrial/dental production, and only 20 per cent goes to retail investors and exchange-traded gold funds.

The following are a few of the many in”uencing factors that drive the gold market in different directions and play a pivotal role in the world economy.

Gold as a Safe haven Asset

A safe haven protects investors against a possible catastrophe. That’s why many investors Buy Gold. Much casual discussion on gold (and indeed other assets) alleges that they are “safe havens” for investors in times of stress.

Central Banks

At the end of 2004, central banks and official organizations held 19 per cent of all above-ground gold as official gold reserves.

Jewellery and Industrial Demand

Jewellery consistently accounts for over two-thirds of the annual gold demand. Chinese demand for gold bars, coins and jewellery soared by 32 per cent to record levels in 2013, even as the price of gold slumped 28 per cent. The surge in buying saw China overtake India as the world’s top consumer of physical gold, importing 1,066 metric tons of the metal compared to India’s 975 metric tons in 2013, according to new data from the World Gold Council. (A metric ton is equal to 2,204.6 pounds)

Short Selling

Short selling of gold can be done in either futures markets or physical markets. Trading in futures markets is an important driver of gold prices and this has led to repeated claims of market manipulation, mostly by people who believe that gold prices have been artificially suppressed.

War, Invasion and National Emergency

When dollars were fully convertible into gold via the gold standard, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. In cases of war, invasion and national emergency, customers withdraw their deposits from a financial institution if they fear their bank will fail. They then demand cash or transfer those funds into government bonds, precious metals or stones, or a safer institution because they believe that the financial institution is, or might become, insolvent.

Hedge Against Financial Stress

Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency devaluation.

Gold Jewellery Recycling

In recent years, the amount of second-hand jewellery being recycled has become a multi-billion dollar industry. The term “Cash for Gold” refers to a service for people to earn cash by selling their old, broken, or mismatched gold jewellery to local and online gold buyers.

Many investors know that gold is a “safe haven” asset that can actually increase in value during stock market slides and times of recession. But what else do we really know about this commodity? Are we taking full advantage of it? Do we know how to work it into our overall investment strategy? Can we afford not to buy gold? Let’s think now!