October 27, 2021

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The Uncertainty Revolving Gold as a Hedging Assets

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The Uncertainty Revolving Gold as a Hedging Assets

The aim of a hedge asset is to eliminate the risk of financial loss in economical and political crises. If not complete protection, a hedge asset should potentially reduce the risks and should be valued to recover at least the investment.

Gold has been a hedge asset for centuries until a pandemic hit the global economy. gold has been an asset that lacks credits and default risks as well as gains value when the global interest rate is down. s\Solid assets such as natural resources or precious metals are used as the hedge against inflation absorbing the shocks in equity, bond, and oil markets.

Gold as a hedging asset is currently facing a downfall and investors are concerned. The hedging assets are taking a shift towards digital and more industrial assets.

According to the Bloomberg Commodity Index for 2021, gold was ranked as the second-worst performer. The demand for gold decreased 10% in the first half of the year as the investors started to chase the reflation trade. We can put it on the whole covid situation and global unemployment but investors have lost trust in the bullion.

For the year of the pandemic, we can say that gold has lost its luster as a hedging asset. With the current circumstances, the investors are more inclined towards investing in energy, agricultural commodities, energy, and other assets that are tied to post-pandemic growth.

Some of the reasons for the underperformance of Gold:

industrial metals such as copper, aluminum, nickel, and iron ore are outshining gold as precious metal this year. The increasing demand for cars, infrastructures and renewable energy is driving the rates of industrial metals higher making it a great investment. aluminum alone gained value up to 30.8% in 2021 whereas copper and nickel gained 22.4% and 16% this year.

The dollar and gold have an inverse relationship. The dollar has been strengthening over the past few months, especially since the Fed announced tightening its monetary policy soon. The solid rock value of the dollar automatically decreases the demand for alternative assets such as gold.

The gaining popularity of cryptocurrencies gained ground and pushed off the gold. investments allocate 10 to 20% of the investments in alternatives such as private equity, hedge funds, and gold. However, gold was significantly replaced by cryptocurrencies during the covid19. cryptocurrencies bitcoin gained value 54% whereas Ethereum surged to 335% at the same time.

Economists claim that stocks or cryptocurrencies are better positioned to hedge against long-term inflation for investors. It has been proven that stocks have produced the highest inflation-adjusted return over the long term with any major asset. Over the last year, Bitcoin’s performance is directly aligned to the movement in bond yields which is to say the bitcoins benefit directly from the reflation trade. Many experts claim that the recent decline in the gold luster has been an event backed by the reflation trade. While others say that the biggest reflation trade is near that will flip over the economy.

As far as the gold supply is concerned it is not static. The supply of gold increases 1.25% every year but it is tricky and expensive to store the metal directly influencing the high rates in the market. Additionally, the gold is harder to transport globally and can be confiscated easily. With increasing custom charges, that is another hurdle in the gold rates.

How Much Gold Declined in Value?

till to date, the gold has declined 7.5% dragging down the silver and platinum with it. According to the World Gold council, since 2014, the post-pandemic has been the biggest decline in demand driven by gold-backed exchanged funds. The trade was estimated to be around 129 tonnes of net outflows in just six months.

Nearly a year ago gold was valued at $2000 per ounce. However, after rising to a year-high of $1,916 a troy ounce in May, it fell back to $1,827 in August. Gold previously had influenced the rate of other precious metals directly. However, since the increase in industrial demand, the tables have been turned upside down.

With the blow to the value, another below is that the upcoming generations prefer investing in digital assets as compared to metals or tangible assets. According to the reports only 7.5% of millennials aged 25-34 own gold and silver. 25% of millennials have already invested in some form of digital currency whereas 31% are willing to acquire it once they discover a suitable form. There are several risks and regulations to digital currencies but individuals are willing to invest in the mainstream.

What are the Future Hopes for Gold as a Hedging Assets?

Gold is volatile in the short term but has been a strong hedge against inflation in the long term.

while the investors like to call the current situation post-pandemic recovery. However, with the discovery of the delta variant of covid19, there is little evidence that we are in the post-pandemic recovery state.

For the gold prices to noticeably gain again it needs a group of investors. The ETF investors are not willing to buy gold which is just the support the precious metal needs to overcome the precaution of decline in the first quarter of the year.

However, according to the economist, gold can still win over the ground due to the instability and accessibility of cryptocurrency and stocks. Gold is a classic hedge asset for its uniqueness, use, and accessibility to millions of people. Gold stocks prices are likely to increase in the phase of recovery when the other forms of assets will surge the rates in the market.

Gold as a form of hedging investment may look like a liability during the covid19 and its ever-changing phase. However, for investment, it is still an available option for small investments. It is one of the best times to buy gold for ornaments and a small investment for beginners. For the current status, you can keep an eye on the growing percentages daily.


S M USAMA

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