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A few people argue that gold can be a barbaric relic, which no longer has a hold on the monetary qualities like the past. The paper currency has become the choice of money for people in this modern economic environment. They believe that the only benefit of gold is that it is a metal used for jewelry.
On the other hand, there are people who think of gold to be an asset that has intrinsic qualities, which make it unique and important for the investors to include it in their portfolios.
For understanding the purpose of gold entirely, we will have to look back to the beginning of the gold market. While the history of gold dates back to 2,000 BC, when the Egyptians began forming jewelry, it was not until 560 BC that this precious metal started to act as a form of currency.
During that era, merchants wished to create an easily transferrable and standardized form of money, which would make trade simpler. The formation of a gold coin that was stamped with a seal seemed to be the solution because gold jewelry was widely recognized and accepted throughout different corners of the world.
After the gold was accepted as money, its importance kept growing throughout the UK and Europe with relics from the Roman and Greek empires prominently being displayed in museums across the globe and Great Britain starting its own metal currency in 775.
The British pound (symbolizes a silver sterling pound), pence, & shillings were all dependent on the amounts of the metal like gold or silver, which it represented. Eventually, this golden metal symbolized wealth across Europe, Africa, the Americas, and Asia.
Although gold does not back the US dollar or any other currency in the world at that, it still holds importance in the present society. Gold is still essential to the world economy. For validating this point, there’s no need to look further than the central banks’ balance sheets and other financial institutions like the IMF or International Monetary Fund. Currently, such institutions are responsible for holding around 1/5th of the supply of the world of the gold above-ground. Moreover, many of the central banks have made additions to their current reserves for gold, showing concerns regarding long-term global economies.
The reason behind gold being important in the current economy relies on the fact that it has preserved wealth successfully throughout many generations. However, the same can’t be said regarding paper-dominated currencies.
The concept that gold preserves your wealth is way more essential in such an economic environment where investors have to face the declining value of the US dollar and increasing inflation. Historically, gold has played the role of being a hedge from both such situations. With the rise in inflation, gold generally appreciates. When the investors come to the realization that their money’s value is being lost, they will begin positioning the investments in one of the hard assets, which has managed to maintain its value traditionally. The period of the 1970s shows a prime example of increasing gold rates in the middle of rising inflation.
The reason why gold benefits from decreasing the US dollar is that gold is priced in US dollars across the world. This relationship exists because of 2 reasons. First is that the investors planning to purchase gold (that is central banks) will have to sell their US dollars for making this transaction. Ultimately this drives the US dollar to go lower as the global investors look forward to diversifying out of dollars. Another reason is related to the fact that the declining value of dollar leads to the decline in the gold price for the investors who hold currencies, which have appreciated as compared to the US dollars.
Whether it is the stress in the Middle East, Africa, or other places, it is getting increasingly obvious that economic and political uncertainty is another reality in this modern economic environment. This is the reason why generally investors consider gold to be a safe haven in times of economic and political uncertainty. What is the reason behind this?
The history is filled with falling empires, the collapse of currencies, and political coups. In such times, the investors who have held gold were capable of protecting their wealth successfully and in some cases, even make use of the commodity for escaping from all the turmoil. As a result, whenever there is any event in the news, which indicates at some kind of economic uncertainty globally (such as the coronavirus pandemic), the investors usually purchase gold as their safe haven.
Currently, the entire world is fighting against the COVID-19 pandemic. Just as any other event of economic downfall, in this case also many people have begun to stock gold in the pure and physical form dependent on the present gold rate in Dubai. The situation in the market has led to a rise in the gold rates across the globe. However, there are still many who wish to stock this golden metal even after its high price due to many reasons. Gold is one of the commodities that have managed to maintain its value as long back in time as we can remember.
Based on the current gold price in Abu Dhabi and other Emirates, gold is considered to be the most common tool for offering hedge from inflation or economic crisis in the UAE (in fact all around the world).
What you need to understand is that gold is not always a suitable investment. The most appropriate time for investing in any asset is when there is a negative sentiment related to it in the market and the asset has become inexpensive, offering substantial better potential on returning to favour.
In a Nutshell!
There are both pros and cons to each investment. In case you are against holding physical gold, purchasing shares of a gold mining organization can be a safer option. If you think gold can be a better alternative against inflation, then the paths such as investing in bullion, jewelry, or coins can take you to prosperity on the basis of gold. And, if your main interest is in making use of leverage for earning profit from increasing gold rates in Dubai, the futures markets can be a good option for you. However, make a note that there is a fair risk involved with any kind of leverage-based holdings.