Since prehistoric time, human are using the gold in trading and value keeping asset. Even current financial activities are always surrounding by the gold issue. The ancient treated the gold as the true form of wealth. Gold has been using early in 4000 B.C as a fashion decorative object in where today Eastern Europe is centered. In 1500 B.C the gigantic gold-bearing regions of Nubia made Egypt a wealthy nation. By the time the gold has widely recognize as the standard form of medium of exchange for international trade. Gold is represented the royal and honorable in different religious and cultural area. Its aesthetic appearance is the finest ornament above all other metal. Gold play the role in all aspect around us, such as religious customs, reward system, ornament, jewellery, and even the component of industrial product. Gold exist and be using for decade, its intrinsic value is still maintain high and irreplaceable.
Investing in gold has been seen as the supreme way of safe haven investment. Gold investment is booming in recent year and the reasons behind this incident can be explained as the investor become more aware of the benefit of the gold and its special features. Gold demand for investment purpose accounted one-thirds of gold demand all over the world which is substantial influential. Investment demand for gold has shown as significant increase in the last seven years as investor seeking the fashion to balance their investment portfolio and safeguard against the economy and political uncertainty.
The characteristics of the gold provide strong foundation of the demand for the gold especially during the recession or economic uncertainty period. The liquidity risk of the gold is relatively low as compare to other investment vehicle especially during the economic hardship. The gold market provide high liquidity to investor when they are in the need of the fund. The collateral is a second source of repayment to the loan. The Marketability of the asset is an important consideration to the lending decision. The Marketability of the asset depends on the acceptability of the particular asset. Gold has the characteristic of acceptability. Gold is widely acceptable and investor can sell the gold whenever they need the liquidity of the fund.
In the evolution of the world monetary system, the gold is increasingly been esteemed as the new form of currency after the abandoned of the Bretton Woods System in year 1973. The loss of confident towards the paper notes and some professionals have pointed out gold as a true form of medium of exchange. The money is backed by nothing other than the confidence that its holders place in the issuing bank. The paper notes will be able to exchange for goods and as way to store their wealth. However, it depends on the ability of that government to keep inflation under control. The problem of the flat money have cause the Zimbabwe’ nation suffer from the hyperinflation due to the excessive money supply.
Gold demand is high in the country such as East Asia, India and Middle East. In addition, China, India, USA, Italy, and Turkey accounted 55% of the total gold demand of the world. The gold demand can be divided into the jewellery demand, investment demand and industrial demand. Jewellery demand has a highest percentage to the total gold demand. India is the largest jewellery demand due the cultural and religious tradition which is independent to the economic variable. The investment demand which is the primary consideration in this research mean the gold is been traded over-the-counter market. The investment demand has a dramatically increase over last five years. More investors seeking gold as protection against the instability of numerous macro-economic variables such as inflation, currency exchange rate, and interest rate. In industrial demand, gold has been use as the thermal and electrical conductor, the demand arises from the use as an electrical components.
Benefits of Gold Investment
Gold is an efficient investment vehicle for preservation of wealth and a store of value during the economy volatility especially the high inflationary period. The special features of gold such as diversifier, safe haven, inflationary hedge, universal acceptance, and transportability have make the gold demand the superior choice for investment purpose.
Generally, the group of similar asset will react correspondingly among each other during the transformation of the economy and financial system. Diversification will reduce investor’s risk in portfolio investment. Besides the common investment vehicle like company share, bond, and mutual fund, gold investment is an option for investor to diversify their investment portfolio. The inflation rate surge high every year, the real wealth of the investor is diminish over time if they do not involve in the inflationary hedging activities. Among the inflationary hedging activities, gold investment is the safer form of instrument. It is because gold have the high demand and high intrinsic value instead of the legal tender given by the authorities. In addition, the gold is durable and imperishable even for thousands of years. Thus, it acts as a superb value storing asset among others. Risk adverse investors such as elderly will be able to keep their wealth more efficiently and withstand the uncertainty in future. Portfolio that contains gold investment is generally more robust and less risky as compared other investment vehicle.
The inflationary hedging ability of gold is prominent especially during the economic uncertainty period. Gold price react quickly that other commodities when there is any change in the market condition. Conversely, price of the CPI-basket is adjusted slowly to the change of market condition. Risk factors that may affect the gold price are quite different in nature from those that affect other assets. Purchasing power of gold is maintain even the transformation of the era is remarkably significant.
In addition, gold is one of the examples of safety investment instrument that have very limited amount of risk associated with it. The credit risk is the possibilities that the debtor unable to repay the loan. Gold is unique which do not involve such repayment relationship. The profitability of gold investment is operating in the accrual basis. The liquidity risk which means the possibilities that the asset cannot be sold as the buyer in the market may not be available during the time of reselling. However the gold market has high demand rate from the individual consumer, jewellery sector, financial institution and manufacturing of industrial product. Thus its liquidity risk of gold investment is very low.