Gold has historically been referred to as a ‘Safe Haven’ or ‘Store of Value’ asset which is a safe place for investors to ‘store’ their cash during times of instability or uncertainty.
Adored for thousands of years, Gold, a precious metal, has historically been used for industry, beauty, and most importantly, trade. This is true through today where it powers trade amongst individual traders, up to the world’s central banks.
With Gold being an internationally recognized commodity throughout history, it is no wonder that it has remained a popular commodity amongst traders until today.
Gold is generally viewed as a store of value that has retained its worth over time, despite economic booms and busts. Larger economies like the US, UK, Euro zone, and China still hold large gold reserves, even though the commodity is not directly tied to the currency's value.
In order for these currencies to retain their value, central banks use the purchasing of gold as a tool to show they have a physical asset to justify the valuation of their money. For countries experiencing high inflation, they may purchase gold to hold in their reserves. This may instill confidence in investors and traders, proving that they have the ability to stabilize their currency. While this is just one of many tools that central banks use to maintain a stable currency, traders recognize this yellow metal as providing greater legitimacy to a country’s currency valuation.
Inflation- When a currency experiences greater than normal inflation, traders may prefer to store their value in gold since it is relatively stable and has historically held its value well.
Supply- Like other commodities, supply has the power to lower Gold’s price if a market becomes saturated or raise the price if scarce. New Gold discoveries increase availability where there may have been a shortage.
Unlike some consumable commodities such as Oil and Corn, Gold is still tradeable even after being used. If the price goes higher, it is more advantageous for miners to mine for new Gold. If the price drops, they may not mine as much resulting in less supply in the market.
Demand- Demand for Gold can be triggered by the demand for the metal in jewelry, industrial uses, and trading. If demand is greater than the supply, the price may go up. On the other hand, if demand is low and the market has a surplus, the price may drop to attract buyers or it may rise depending on buyer demand.
The US Dollar- Gold is priced in dollars making the US currency a player in how attractive the commodity is to foreign inventors. If someone trades in Euros, Pounds, or another currency, a devalued USD may make the commodity more attractive while a stronger dollar may have the adverse effect.
Geopolitical events- As a global metal, geopolitical events can have an effect on the supply of this precious metal. Events can also affect the movement of currencies, changing the relative value of Gold and potentially sending large amounts of traders to or from this commodity.
The correlation between Gold and paper currencies is a give and take that has been taking place for decades. Countries use gold to increase the value of their currency but must devalue their currency in order to obtain it.
From the perspective of traders, Gold is yet another currency where they can park their value in times of instability or currency deflation.
While there is no certainty that Gold will retain its value, traders rely on historical prices to estimate that a falling paper currency may instill a lack of confidence in the currency, creating a further devaluation of said currency. Other events that can affect the value of a currency are inflation, political uncertainty, significant trade deficits, and any other significant event which may affect its value.
As a currency drops, traders may turn to gold. If enough traders turn to gold at a given time and create waves in the market, it will increase demand without introducing a matched supply, causing the commodity to climb in line with demand. On the other hand, if individuals invest in a stable currency and new Gold supply exceeds demand, then the price may fall.
For example, when a trader holds GBP and recognizes that there is a large trade deficit within the EU, which has resulted in a devaluation of the British Pound, he may look to gold as its value may be on the rise in comparison to the currency he holds.
On the other hand, if an investor is holding Gold and the value of GBP rises, he may shift his investments towards currencies.
Apart from the common man, central banks also have been holding gold reserves as a store of value right from the days of Gold Standard and Bretton Woods Standard. In 2009, the Government of India purchased 200 tonnes of gold from the International Monetary Fund (IMF) at $6.7 billion. This purchase propelled India to the tenth position among top gold reserves holding nations.
Silver is a brilliant grey-white metal that is soft and malleable. The mining of silver began some 5000 years ago, with the first mine being in Anatolia (modern-day Turkey). The principal sources of silver are the ores of silver, silver-nickel, lead, and lead-zinc obtained from Peru, Bolivia, Mexico, China, Australia, Chile, Poland, and Serbia. Peru, Bolivia, and Mexico have been mining silver since 1546, and are still major world producers. Just over half of the mined silver comes from Mexico, Peru, China, and Australia, the four largest producing countries. Primary mines produce about one-third of the world silver, while around two-thirds come as a by-product of gold, copper, lead, and zinc mining. The top three silver-producing mines are Cannington (Australia), Fresnillo (Mexico), and San Cristobal (Bolivia). In Central Asia, Tajikistan is known to have some of the largest silver deposits in the world.
Silver has innumerable applications in art, science, industry and beyond. At the highest level, though, demand for silver breaks down into three important categories: silver in industry, investment, and silver jewellery and décor. Together, these three areas represent more than 95% of the annual silver demand. With unique properties, including its strength, malleability, and ductility; its electrical and thermal conductivity; its sensitivity to and high reflectance of light; and the ability to endure extreme temperature; it is an element without substitution. Commercial-grade fine silver is at least 99.9% pure, and purities greater than 99.999% are available.
Silver, like gold, is the final form of currency. Although silver is far less valuable than gold, it is a traditional precious metal, and its long-term trend follows gold. Silver has industrial metal properties, and the global demand for silver is growing.
After the establishment of the precious metal trend, the volatility of silver will be much greater than that of gold. At the same time, it has the same market fairness as gold, flexible trading time, and has the investment value of spot and option models.