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Gold: The Inverse Value To Macro-Economic Vitality

Updated on December 26, 2009

The current demand by consumers around the world for jewellery made of gold is exceeding the 20% per year level. Men and women around the world have significant confidence that gold is a superlative investment and therefore they spend a great deal of their earnings in collecting gold whether it be for wealth protection, or for personal adornment, or both. It is interesting to note that this global demand is far higher than the current supply which the mines all over the world can place into the gold market.

Since gold is possibly the number one hedge to protect against runaway inflation, it is very important to investors to realize that there is an inverse correlation between the U.S. dollar and gold. This critical aspect makes gold such an excellent hedge against currency problems, fluctuations and devaluations.

Gold has the overall global advantages of being regarded as a form of currency: an asset class all by itself. However gold is not subject to the considerable disadvantages of being subjected to the policies to control the monetary, fiscal and economic structures of any one government of any one nation in the world.

Over the past couple of decades, there has not been any significant statistical correlation between the value of general equities and the price of gold. Therefore it can be said that gold can act as a diversifiable portfolio which is greatly effective because it has a negative or very low correlation with the other significant classes of assets. This negative does not only refer to the United States domestic consumption equities but also to the various equities traded in the international stock markets such as Tokyo, London, Frankfurt, Milan and so on.

It is also important to realize that the other main asset classes such as treasury bills, real estate investment trusts, government bonds and other forms of investments also have no significant correlation at least from a statistical standpoint with the value of gold. The basic reason for the fact that there is a little if no correlation is that the factors which affect the daily set price for gold are quite different that the factors which are determining critical points which drive the value of those other assets.

There are a vast number of factors in the financial universe which have a strong influence on any investment's performance. However the variations in the supply and demand of gold do not show any clear influence when compared to other classes of assets. There is considerable evidence especially in the last year or two that when the world of equities comes under a form of severe stress or possible even collapse, there is an inverse correlation which then occurs between equities and gold. When share prices are rapidly precipitating downwards in value, gold can seem to be an excellent hedge and therefore the price for gold skyrockets as we have recently seen just in the past few weeks with gold exceeding 1,200 dollars an ounce: Violating previously set historical highs by a third!

Continued In Gold: It Has Always Been The World's Universal Currency

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