Gold has attracted investors throughout the centuries, protecting their wealth and providing a 'safe haven' in
troubled or uncertain times. This appeal remains compelling for modern investors, although there are also a number
of other reasons that underpin the widespread renewal of investor interest in gold.
In volatile and uncertain times, there is typically a 'flight to quality' as investors seek to protect their
capital by moving it into assets considered to be safer stores of value. Gold is among a handful of financial
assets that do not rely on an issuer's promise to pay, offering refuge from default risk. It provides insurance
against extreme movements that often occur in the value of traditional asset classes in unsettled times.
Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The
reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single
asset or group of assets that react in a common fashion. Portfolios containing gold are generally more robust and
less volatile than those that do not.
Market cycles may come and go, but - over the long term - gold keeps its purchasing power. Its value, in terms of
the real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of
many currencies has generally declined due to the impact of rising prices for goods and services. As a result, gold
is often bought to counter the effects of inflation and currency fluctuations.
Gold is often used as an effective hedge against fluctuations in the US dollar, the world's main trading currency.
If the dollar appreciates, the dollar gold price falls, while a fall in the dollar relative to the other main
currencies produces a rise in the gold price. While this may also be true of other assets, gold has consistently
proved among the most effective in protecting against dollar weakness.
On the whole, gold is significantly less volatile than most commodities and many equity indices. In this respect it
tends to behave more like a currency. Including assets with low volatility in a portfolio will help to reduce
overall risk, with a beneficial effect on expected returns. Risk factors that may affect the gold price are quite
different in nature from those that affect other assets.
Demand and supply
As is true of all asset prices, gold's price moves in response to the changing balance between supply and demand.
Mine production is relatively inelastic due to the long lead times that exist in gold mining, which explains why
the rally in the gold price since 2001 has still not engendered an increase in production levels. Meanwhile, demand
has shown sustained growth, due at least in part to rising income levels in gold's key markets. This has created
the foundation for the most positive outlook the precious metal has known for a quarter of a
Gold has attracted investors throughout the centuries, protecting their wealth and providing a 'safe
haven' in troubled or uncertain times. This appeal remains compelling for modern investors, although
there are also a number of other reasons that underpin the widespread renewal of investor interest in
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