Despite the fact that gold no longer backs the U.S. dollar, or other currencies for that matter, it still plays an important place in an investor's portfolio.
Historically gold has influenced several powerful empires, such as those of the Greeks and Romans for example. Eventually, there came a time when gold symbolized wealth throughout Europe, Asia, Africa, and the Americas. Nowadays however, there is a school of thought that argues gold is simply a barbaric relic that no longer holds the monitory qualities it once did. In a modern economic environment, where paper currency is the money of choice, some say gold's only benefit is that it's a material commonly used in jewelry.
Gold As a Hedge Against Uncertainty.
Despite the fact that gold no longer backs the U.S. dollar, or other worldwide currencies for that matter, it still plays an important place in an investor's portfolio. The reason for this is that gold has successfully preserved wealth for thousands of years. This is particularly important in an economic environment where investors are faced with a powerful U.S. dollar, a risk of rising inflation, austerity measures, and/or slowing developed market growth. In the past, gold has successfully served as a hedge against all of these pressures.
Buying gold bullion is not a proactive method of obtaining wealth as much as it acts as a safety net against inflation. - Jim Armiento, Financial Adviser
Gold's Relationship With Interest Rates
It is widely accepted that the price of gold has a close relationship with interest rates. As interest rates rise the general tendency is for the gold price to fall. Conversely, as interest rates dip, gold prices will rise. Because of this, gold price can be closely correlated to central banks via the monetary policy decisions made by them; particularly related to interest rates.
Many investors and market analysts believe that as interest rates rise they make bonds and other fixed income investments more attractive. When this happens, money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold; which offers no yield at all. Therefore, before buying or selling gold, investors should look to the reason for the interest rate hike first, to determine if it occurred to contain inflation or if it is a genuine normalisation of monetary policy.
A Final Thought on Gold.
Whether it is the tensions in the Middle East, Brexit or the policies of President Trump, it is becoming increasingly obvious that political and economic uncertainty is prevalent our global economic environment. For this reason, investors typically turn to gold as a safe haven during times of political and economic upheaval. Looking back to the 2008-2009 recession, and in 2016 after the stunning Brexit victory, you might remember that gold became increasingly appealing because of uncertainty in the political and economic future.