In 2011, 10 grams of gold touched $1921 in the International commodity markets. That is huge considering that it began its upward march from $300 in early 2000’s. At the beginning of 2000’s, many central banks liquidated their gold positions. They had reasons to do so because inflation was going down and holding gold reserves in such period did not make sense.
However, gold marched up smartly, surprising many analysts because that was not expected to happen.
Gold’s value depends upon many things apart from inflation. If interest rates increase, gold prices drop. Likewise, if inflation rises, gold prices rise. Gold also shares an inverse relationship with the dollar. All these rules, however, are not hard and fast rules. Therefore, gold can increase in price even as the dollar is increasing in value.
So what can you expect when economies end up in the grip of recession? Fall in gold’s price of course because recession also means lower interest rate regime. Therefore, gold prices were doomed to fall from their peak in 2011. Spot gold hovered around $1100 in 2015.
Why is China Buying and Holding Golds Reserves?
Volatility and seemingly unpredictability should have kept central banks of most countries away from this commodity. After all, in late 1970’s, gold ceased to be the standard used for determining values of different currencies across the world. In this scenario, gold should have been a touch me not commodity, especially since there are not many applications other than in jewelry industry. However, some countries steadily increased their investment in this commodity, and China is one of them.
The country steadily increased its gold reserves from 395 metric tons earlier to 600 tonnes in 2002. By December 2015, China had managed to increase this holding to 1708.5 metric tons.
For China, one of the primary reasons to invest as a nation is that gold as an asset does give currency some stability from ups and downs in the currency market. After all, there is a fraction of that wealth represented in the currency. In turn, such stability of currency entitles the country for special drawing rights and Chinese Yuan now rubs shoulders with elite currencies such as Japanese Yen, British Pounds Sterling, and the US Dollar because Yuan now exhibits strength of gold holdings behind it.
Other Countries are Stockpiling Too
China is not alone in this pursuit. Russia, Kazakhstan, Jordan, The UAE, and Turkey have all increased their holdings over a period. Going forward,more gold will be accumulated by many nations because of stability in currency price due to gold. After all, the US dollar has been steady for relatively long with the backing of 8000 tons of gold.
Stability in currency has become one of the most acceptable reasons for investing in gold. This commodity is hardly likely to see the low levels of the past. In fact, 20% hike in gold prices by the end year, i.e., end of 2016 can safely be anticipated.
So, you can analyze that this prospect makes gold an attractive short-term investment opportunity for you. Moreover, holding on gold investments for a long time will not be harmful too.
How can you invest in Gold?
Investment in gold may be through-
a. Exchange traded funds;
b. Mining investment funds; or
c. Physical gold
Gold Exchange Traded Funds
These are like small units of gold. The bank or authorized financial body buys gold in bulk quantities. Its value is then divided into units, and these units are sold to applicants at a premium. Gold is then deposited at thegold council. The buyer can choose to sell the units on stock exchanges, or ask the issuing authority to pay up the gold those instruments represent.
Gold Mining Investment Funds
These funds are like shares in gold mining or exploration business.
Gold jewelry, sovereigns, gold bars come under this category.
If you are an investor,you should wait and watch what impact these gold stockpiling nations will make on the commodity market, and it is better to diversify your portfolio by investing in the various options.