Investments in gold
Since 2008, the precious metal has experienced the effects of rising and falling. The purchase of this asset is still interesting for many investors due to conditions of geopolitical tension and instability of the world economy for the last 10 years. Many investors believe that the share of gold in the investment portfolio should be at least 10%.
In addition, gold is the capital protection from inflation and adverse changes in the exchange rate, also it has high liquidity (Graph 1).
Graph 1. Source: Bloomberg
During 2007-2008, the FED gradually lowered its rate, the minimum rate reached 0-25% in December 2008, after which investors invested in precious metal to save their funds (Graph 2).
After the statement of former FED Chairman Ben Bernanke about the reduction of the quantitative easing program, the precious metal began to move downward in 2013 (Graph 2). Investors did not view gold as a safe asset, after the FED’s intention to raise the discount rate.
According to Bloomberg, as of October 3, 2017, the growth of the precious metal is observed at 11% due to a number of factors related to Donald Trump’s economic policy, the UK’s withdrawal from the EU, and local conflicts and crises that entailed geopolitical tensions. Moreover, the tightening of the monetary policy of the Fed can reduce the demand for gold, as it was in 2013.
Graph 2. Source: Bloomberg
The increase in prices for the precious metal may cause profit growth for gold mining companies (Graph 2). In spite of the fact that such shares do not always have a high level of profitability, one can expect dividend payments even if there is no increase in prices for gold. However, there is a risk of bankruptcy of the company or a sharp decline in the value of its shares, in this case, the investor risks losing all the funds invested in them. Therefore, the shares should not be considered as a protective asset, performing the function of financial insurance as gold. In addition, the upside potential in the value of shares is determined not only by the dynamics of gold prices, but also by the financial performance of the issuing company.
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