Golden Record!

Gold

Image source: nattul / Shutterstock.com

What's going on?

Investors want more gold! Demand for gold jumped 21% in the first quarter of 2016 (according to the World Gold Council). That’s the biggest quarterly increase ever!

What does this mean?

The best way to understand gold is to realize that it’s just a different type of currency. Just like a $100 bill is a piece of paper, a bar of gold is just a block of metal. But both can be exchanged for things of value. The main difference is that gold doesn’t pay any interest: you typically keep your US dollars in a bank (or investors might keep them in US government bonds) where you get paid some interest each year. You can’t do that with gold. Therefore, the value of gold can be determined by the income you lose by owning it (i.e. the interest you are foregoing). With that in mind, it makes sense that demand for gold increased big time in the first quarter as interest rates in most major economies were at historical lows.

Why should I care?

For you personally: Some people say owning gold should be a fundamental part of most investment portfolios. It’s argued that gold provides a diversification benefit. That means its price often moves differently to that of, say, stock prices (because its value is often determined by different factors, e.g. companies’ earnings don’t matter to the price of gold).

The bigger picture: Gold is considered good protection against inflation. The best scenario for the gold price would probably be one where prices in the economy start increasing but interest rates remain low. The opportunity cost of owning gold versus other “currencies” would remain low (because of low interest rates), but gold would go up relative to, say, the US dollar (because inflation erodes the dollar’s value). While the world is suffering from extremely low inflation right now, there are some who are warning that inflation is likely to increase soon (including Pimco). It’s worth keeping an eye on this dynamic.

Originally posted as part of the Finimize daily email.

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