SAFE HAVEN ?! Let's go "GOLD" !!

As connoted in my last post; when all investment options fail, it's time for investors to GO GOLD ! As promised; let's do a reality check as to why the 'yellow metal' will certainly yield good returns.

GOLD AND DOLLAR - the inverse relationship 

The price of the US Dollar and Gold are inversely proportional. As investors start losing faith in the green currency, they start to invest more in gold and hence lead to the shooting up of the price of gold.

Let's understand this with a simple example ( Source : Economic Times)

"Like most other commodities, gold is priced in US dollars in the international market. And the US dollar has been losing value against other currencies, including the Indian rupee. The rupee has appreciated by around 6.2% over the past two years, and currently quotes at around . 45.6 against . 48.6 two years ago. This has limited the returns in rupee terms. Let us understand this phenomenon through a simple example. Let us say at a certain point of time gold is at $1,000 per ounce. A year later, it is 
at $1,200. The return in dollar terms is 20%. 
    Now, let us say one dollar was worth .Rs 50 
initially. So, at that point of time in rupee 
terms, one ounce of gold was worth 
. 50,000 (. 1,000 x . 50). A year later, one dollar is worth . 48. At that point of time, one ounce of gold will be worth . 57,600 (1,200 x . 48). This would mean a gain of . 7,600 (. 57,600–. 50,000) or a gain of 15.2% (. 7,600 expressed as a percentage of . 50,000). So even though return in dollar terms is at 20%, the return in rupee terms is rather limited at 15.2%. Of course, an appreciating rupee will limit gold returns, but that does not mean that gold is not a good investment bet. "

So here we have it : 

The governments of nations constantly print currency notes to keep an economy running. The idea was and is that with more money in the financial system, banks will lend more. The increased lending will help people buy more goods and services which, in turn, will benefit companies and thus generate more employment and hence more consumption.

However, when anything is suddenly available in excess quantity, it tends to lose value. So, if the US government prints dollars, as it has in the recent past, the dollar will lose value against other currencies. This, in turn, means that other currencies will appreciate or gain value against the dollar, as the Indian rupee has over the past two years. 

Consequently as more and more currency across the world is printed, all the smart investors will head towards gold, driving up prices of the yellow metal.

P.S: This post has been inspired by the "GOLD VS DOLLAR" ARTICLE that showed up in ET a few months back.