Investing in Gold: why some people are crazy about owning the bullion.

Gold – shiny, precious metal with a huge impact on the history of human kind. For years, gold was one of the main reasons of world conflicts and wars. Many things have changed: Spanish galleons do not transport gold to Europe anymore, Gold rush in California is over but Gold still remains one of the most popular assets in the world.

Currently, when we think about gold in terms of investing purposes, we think – safe haven asset. Safe haven asset means that people allocate their money in Gold, when we do have a risk off mode on the market. Risk off is during recessions, slowdowns or downturns of global economies. In a nutshell: traders shift towards gold, when they expect that something bad is or will happen to the economies or financial markets.

Let’s check this chart, which is showing us how the gold behaved during the last seven, most painful, recessions. Five out of seven times, gold was positive during that time. I think the chart speaks for itself. One thing is worth mentioning here as well. Gold tends to go up during recessions but is not limited only to that! We can see that it can be also a great asset during recovery or even during very advanced bull markets. The simple reason for that is that the risk perception is only one of few factors affecting the price of the bullion.

Another thing that you should know about trading gold is that bullion is perceived to defend us from rising prices due to inflation. It is known that the prices of goods that are rising due to inflation usually negatively affect people’s salaries and savings. Very often, rising inflation is almost even crippling the purchasing power of people affected by it. Owning gold comes handy here as it is proven that it can be used as a protection mechanism. Analysis of the data for the past several years shows us that this mechanism is working i.e. as the inflation rate is rising, gold tends to rise and as the inflation rate is falling gold tends to fall.

When you look at the price of Gold, you will usually see something like this: XAUUSD. XAU (Au is a symbol of Gold from the periodic table) is quoted against American Dollar (USD). Gold is often referred to as ‘antidollar’. When Dollar is getting stronger, gold tends to go down. When dollar is getting weaker, gold tends to go up. Simple is that, just look at this chart:

Do not forget one thing as well: your local currency. Gold can protect you from devaluation of your own currency. That is one of the strategies used by traders all over the world. For example, look at the Ukraine during the crisis with Russia or Argentine or Venezuela. People who kept their savings in their local currency were, in reality, losing money. Those who bought gold were blessed with a huge bullish trend. Simply their local currency devaluated against the dollar, which caused the price of Gold to skyrocket.

(Gold against Ukrainian Hryvnia, look at the 2014/2015)

Thanks to this article, you already know what are the factors affecting the price of the gold and when it is usually good to buy the bullion. I need to clarify one more thing. Central banks, big commercial banks and funds, tend to create trends, not to follow them. Banks start to accumulate gold reserves before the recession. Currently, the street (retail traders) are crazy about stocks, which are on all time highs. What banks do is they accumulate gold waiting for a coming recession (which is a normal economic cycle).

One thing that I learned during those years of trading is that you should never go against the banks, simply because you don’t have enough resources, knowledge and power to go against them. Gold is definitely an interesting asset and can be a great additional to Your portfolio. Remember that you should not put all the eggs in one basket and entering with 100% of your money into one asset would be a mistake and is against good investment practices.