Gold continues to prove its worth amid uncertainty, but it’s not without pitfalls. Image Credit: Gulf News Archive

Dubai: The tendency for many of us to search for and acquire things of value that prove to be highly useful in extreme crisis events, has stayed persistently consistent throughout history.

That’s why gold has occupied a predominant space in public perception as a trustworthy asset that not only protects people’s purchasing power in the long run against the price of goods and services, but also grows in value over time.

Indeed, gold as a real and tangible item of value seems to have reassured millions of people around the world, and it is common knowledge that whenever calamity strikes, gold remains the safe haven – especially for those who have to increasingly spend a lot more money to keep buying the same products and services.

Is gold still outshining other investments?

While this makes it evident that buying gold brings with it long-term benefits, it is critical to understand what they are and how to go about it. Between 2006 and 2021, the average price of gold rose by 9.2 per cent. But in the last two years, the yellow metal shot up by a record 24.6 per cent in 2020 before falling 5.7 per cent in 2021. Since then, gold has gained 5.2 per cent during 2022 so far.

In other words, people around the world are confident about gold’s ability to rise above the current spiral of inflation and volatile geopolitics. That is because the interconnected factors driving the rise in gold prices will stay intact in the coming months.

The US dollar, to start with, has always been connected to gold: the stronger the dollar, the weaker the gold and vice versa. But this inverse relation changed after the 2008 financial crisis, where both the dollar and gold were found to increase in value simultaneously. The US Dollar Index (DXY), which measures the value of the dollar against a basket of six world currencies gained 6.15 per cent every year, while gold prices increased on average by 14.13 per cent during the same period.

Is gold still outshining other investments?

Gold still holds long-term perks over peers

Gold also acts to offset any potential losses due to rising inflation around the world – and we now have the highest inflation in 40 years in the US at 8 per cent, Russia at 10 per cent, the UK at 7 per cent, and Turkey at 54 per cent. When money – in their local currency – can buy people less things, they always tend to buy gold.

At the same time, global markets seem to be in denial about the growing risk of inflation that could potentially combine with stagnant economic demand and rising food costs to create a challenging situation. That is exactly the kind of situation where people can expect the price of gold to go up further, regardless of any temporary price fluctuations.

The good news is that today, anyone wanting to buy gold has a wide variety of options based on their preference, taste and convenience: physical gold (bullion), gold jewellery, investment funds that use gold as the underlying asset, and stocks of gold mining companies.

People living in Europe, Japan and the US historically do not have much appetite for physical gold, compared to people in the Middle East, India and China – due to a combination of cultural background, stable currencies and a strong economy. However, buyers of non-physical gold must remain vigilant against the manipulation of gold prices.

What is ‘gold market manipulation’ and how does it affect the price of gold?
Gold market manipulation, called also gold price manipulation, can be defined broadly as a purposeful effort to control gold prices.

This sort of manipulation exists in financial markets as traders try to influence the markets (in this case, the gold market). It may be responsible for some short-term aberrations in asset prices, including the price of gold.
Gold, jewellery, gold ornaments
Know when and how you can sell gold

Know when and how you can sell gold

It is equally important to understand when and how you can sell gold. Investing in gold is not simply a one-day job to make a huge windfall – that is why many gold traders in a hurry tend to lose their investments or take unusually high risks. The best way to invest in gold is through a long-term plan – which is why it might not be appropriate for everyone.

With a long-term investment, it does not matter whether you are a billionaire or a middle-class employee – what really matters is how long you will hold on to the gold and how weak your local currency is.

It is for this reason that for people living in Middle Eastern countries with high inflation and weaker currencies – such as Syria, Lebanon, Iraq, Iran, and Egypt – buying gold and gold jewellery is still the best option. This segment of buyers should keep at least 35 per cent of their wealth in gold, but this allocation would not work for those in Europe or the US.

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Some gold investments are now highly complex

In addition, there are gold funds currently that use complex financial instruments to increase the returns on the portfolio by two or three times – but it is a very risky business. Therefore, gold buyers would do best to avoid such a route and instead be patient in searching for returns. Typically, the annual return on investment in gold is always more than enough for a single category of investment.

Buying jewellery could be a sensible option as well, provided that shoppers are able to verify the quality and manage cost expectations. Otherwise, it makes much more sense to focus on high-quality bullion from a reputed source, such as a bank, gold refinery or official broker, and secure their future amid all the global uncertainty.

- Chaddy Kirbaj is the vice director at Swiss banking group Swissquote Bank’s Dubai office