gold investment

A complete guide to saving and investing in solid gold

23 November 2022
Reading Time: 6 mins

This is a paid article on behalf of Tally

Gold and the Law of Supply and Demand

Most people are familiar with the law of supply and demand. When demand outweighs supply, the value of that good or service increases. Initiatives like Quantitative Easing enable the government to create more fiat currency (like pounds sterling) [thereby increasing the supply,] which only reduces the value of all pounds – including any money you’ve been squirrelling away.

While governments can create more money, the same cannot be done with gold. Because there is only so much gold on this planet, it is a commodity that many people use as part of an investment portfolio. For many, precious metals are a good way of counterbalancing the risks that come with other investments. Gold, in particular, is often referred to as a ‘safe haven’ when compared with stocks and shares because it tends to perform well when markets are in decline.

According to The World Gold Council, the value of gold has increased by an average of 10-11% per year for the last 20 years, outperforming many other types of investments. Gold is also widely considered to be an inflation-resistant asset. This means that when other commodities are falling in value, gold can offer a level of protection against those losses and, most importantly, against inflation.

Gold in Times of Uncertainty

gold investment

Investors have long since looked to gold in times of turmoil. The Global Financial Crisis (GFC) in 2007 led to a sharp increase in gold investment in Europe, leaping from 70 tons in 2007 to more than 400 tons over the next four years as investors sought to protect their wealth.

More recently, the threat posed by COVID-19 to the health of the European population and economy, combined with large-scale monetary and fiscal stimuli, has caused a similar demand. In January 2020, gold was trading at approximately £1,151 per troy ounce, but by early August 2020, the price was over £1,570 – a 37% increase in a matter of months.

However, uncertainty isn’t the only factor that drives the price of gold. Traditionally, monetary policy has had a significant impact on gold demand. For example, rising inflation can lead to investors using gold as a hedge. Inflation means that the price of goods goes up over a given period of time, thereby reducing your purchasing power. In simple terms, paying out £1.25 for something that only cost you £1 last year. Because gold is generally expected to maintain or increase in value over time, investors put money into gold as a way of preserving their purchasing power.

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