Cliche title for an oft misunderstood metal... but one that has held, and continues to hold tremendous importance to man. As you can guess, I'm on a desk dealing in precious metals, chiefly gold; I will try to explain the mysteries of investing in the metal.
On a simplified basis, gold demand can be split into two broad categories: investment demand and commercial demand. Both names are self explanatory, but to give you a more specific definition, investment demand is comprised of buyers from the financial community - hedge funds, pension funds, mutual funds, anyone looking to speculate or hold gold for the long term. Commercial demand consists of buyers from industry, namely from dental services and car makers. Another important part of this category is made up of individual buyers - India is a huge retail market for gold due to its important uses in their culture, namely in dowries and numerous festivals they celebrate.
Considering both parts of the demand picture for gold, it becomes obvious that it is viewed both as a commodity as well as a store of value. This stands in contrast to other metals which are mainly used as industrial materials. Consider as a short example gold's main rival - silver. Silver is constantly mined and consumed as an industrial metal, and this can be observed in its price, which trades in double digits, compared to gold which trades in triple digits. Also consider that gold is hardly ever consumed as most of it is held physically as jewelry or in bars, to be converted into value later. This means its supply is mostly fixed, while demand fluctuates according to investment and commercial demand.
Thus, gold essentially becomes a currency - which harks back to the era of the gold standard, or the Bretton-Woods agreement. From that legacy, and the metal's cultural history of being a material valued by all, gold today fills the modern role of a currency of last resort, a hedge against inflation, or a hedge against the US dollar. All three roles are extremely similar and are based in a common line of reasoning - should paper based currencies, as they are doing now, continue to be printed freely to stimulate global economies, the fiat currencies of America and Europe will slowly lose their value, making gold even more valuable as the hard asset holds its value better than the paper asset.
Ultimately, the physical gold custody trade is an armageddon trade and is definitely a tail risk event... but it never hurts to be prepared does it?
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