Gold has traditionally been seen as a sort of lifeline during various political and economic upheavals. Through centuries and even thousands of years, it has been a guarantee of stability for those who tried to protect their investments from the increase in the cost of living. Even in times of heightened political and economic uncertainty, this yellow metal has been friendly to hoarders. Therefore, from the point of view of the current political and economic processes, now would be a favorable time to buy gold and its price should rise. This year, the price of gold has already increased by 11-12%. On the afternoon of December 21, it was just above the $2,050 mark per troy ounce.
In practice, it is not so simple
In theory, one might get the impression that one should go shopping for gold, but in practice, everything is not so simple. A lot is determined by the format in which gold is purchased as a means of investment protection, because it depends on how much costs you have to face. If it were a matter of buying physical gold for savings, by buying, for example, bars of this precious metal, then you have to take into account that the metal purchased in this way should not be simply thrown into the desk drawer at home. It is not just that precious metals stored in this way can be stolen. Every insidious slip can serve as a pretext for a significant price reduction when the desire arises to sell it. Therefore, traditionally, gold purchased in this way is stored in a bank safe, the rental of which incurs additional costs. It is much more convenient, moreover, for people with limited budget options, to make the purchase of securities, the value of which changes depending on what is happening with the gold price in the world. In this case, the cost of several thousand or tens of thousands is no longer necessary, as a few hundred euros can be enough. Such securities can be shares of various investment funds, the value of which changes with the price of gold. Also, it can be shares of gold mining companies, the value of which traditionally increases as soon as this investment metal starts to shine brighter in the eyes of investors. But it is even more difficult to determine the right time to buy precious metals. Especially if we look at the market situation in the past year, when there have been so-called cardinal economic turns in the world, for example, a rapid drop in inflation. However, these developments could have been predicted in advance. By anticipating them in advance, you can prepare for them in time. Therefore, there are not so many real moments of surprise. Therefore, the question is whether it is not too late to react to the political and economic uncertainty in the world by buying precious metals. When evaluating the purchase of gold, it is also worth looking at the previous decade, which has not been so bright for gold and its “little brother” silver. Including, during the last ten or ten years, it can sometimes be seen that gold has even caused losses during times of inflation. True, as already mentioned, everything depends exactly on the moment when this metal was bought.
Is it from an expert?
“Right now, gold seems a bit more attractive because there is a lot of uncertainty around. However, this is now not needed as a hedge against rising costs of living, as inflation is now “tumbling” down around the world. But there are other aspects that currently increase the attractiveness of gold,” says Andris Lāriņš, head of the Financial Department of “SEB banka”. He attributes one of them to the euphoria in stock markets, as market participants expect central banks to save the economy by cutting interest rates next year. “The stock market is positive about such actions by central banks, because the appreciation of money has ended, but it is a positive view of negative winds. Namely, interest rate cuts must be done to support an economy that is not doing well. This does not exclude the possibility that difficult times may also come, for example, rising unemployment. Therefore, the price of gold can be gained against the background of the worsening economic situation,” explains A. Lāriņš. Konstantīns Goluzins, head of the Customer Asset Management Department of “Rietumu Banka”, also recognizes that the drop in interest rates can contribute to the increase in the price of gold. He explains that a reduction in interest rates would also mean a drop in the value of the currency, as it would increase the value of that precious metal in terms of that currency. “However, it should be remembered that the price of gold reflects future expectations, which are already counting on a reduction in interest rates next year. Therefore, if the reduction of interest rates does not take place next year, or if it is smaller than expected by the financial markets, it could also have a negative impact on the price of gold,” says the expert of “Rietumu Banka”. He emphasizes the possible increase in the price of gold on the turbulent situation in the world. “Geopolitical risks may continue to underpin and increase the price of gold as the precious metal continues to maintain its ‘haven of peace’ status. However, there is no reason to think that the resolution of these conflicts would be able to significantly lower the price of gold,” argues K. Goluzins. When asked about the outlook for the price of silver, he says that it is considered to a lesser extent as a “harbor of peace” asset, but it too has a direct correlation to changes in currency values. The expert also points to the possibilities of industrial use of silver, so its price also depends on economic cycles. “Therefore, the price of silver is currently ‘sandwiched’ between higher rates and economic activity. If the economy continues to grow, this will increase the demand for silver and positively affect its price, however, a strong economy will also mean higher interest rates, which will reduce its attractiveness among investors, as there will be more profitable alternatives to silver and vice versa,” explains the investment specialist.
There seems to be no crisis, but no real sense of security either
Over the past months, the price of gold has been very volatile, which shows that the gold market does not have a unified view of how politically and economically safe the world is at the moment. Anxiety began to grow with the attack of Hamas militants on Israel, the extremely nefarious nature of which made it clear that Israel would not be held accountable and there was reason to fear that the conflict could spread. Meanwhile, potential economic developments do not go unnoticed. “Since September, the price has been both at 1,800 and at 2,100 dollars per troy ounce, so it could be said that market participants cannot agree whether what is happening in the world right now is good or bad,” adds the SEB bank expert. He emphasizes the background of uncertainty, noting that already in May, the price of the yellow metal had risen above the $2,000 mark per ounce, but then declined again. “The market is watching what the central banks will do, what will happen to the economy, what will happen to inflation, what will happen to the labor market. There is no crisis at the moment and most experts do not expect a crisis. The fact that the economy has fallen by half a percent or a percent is not a crisis, but an ordinary technical recession, a normal part of the economic cycle,” comments A. Lāriņš. He points out that the current situation is different from the previous crisis. At that time, many companies in the world that had made good profits were involved in activities outside their core business. The most popular of them was the real estate market. “As a result, it turned out that when real estate prices fell, companies suffered that should not have suffered from it. If we look at the real estate market now, the whole world is not involved as it was then, therefore investors have not lost money as they did then,” explains the representative of “SEB banka”. Therefore, in his opinion, even the current rapidly growing interest massive bankruptcy waves might not be expected during rates. Speaking about the situation of companies in the current economic conditions, A. Lāriņš reminds that some companies strengthened their balance sheets during the previous inflationary jump and are even now more resistant to the economic downturn. On the other hand, when talking about labor costs, the expert reminds that wages were massively raised in the world not before, but after inflation. As a result, spending increases later, but if the economy can’t grow fast enough now, it could lead to layoffs and higher unemployment. However, if it is not a “massive disease”, then the economic situation will not deteriorate dramatically. Therefore, speaking about the possible shocks of the economy as influencers of the price of gold, A. Lāriņš says that he is not very optimistic about the price growth potential of this investment metal. “Why buy gold when we see well-functioning companies that are not expected to face any significant problems in the near future? If I were very cautious about what was going to happen to the world economy in the next couple of quarters, I would buy a little bit of gold. Those who bought gold earlier when it cost 1,600-1,700 dollars per ounce feel good now, but buying now when it costs around 2,000 dollars per ounce is already something completely different. I’m not saying that you can’t make money, but you have to take into account that gold has already tried to increase in price several times this year, but always turned back,” says A. Lāriņš. Therefore, it is currently impossible to say unequivocally whether large investments in gold will bring the expected results. You have to hurry to the jewelry store, but not so much because the purchase could become more expensive in the future, but rather to find someone happy.
2023-12-25 03:15:40
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