There are in general 3 specific reasons as to why investors turn to gold as investments ever since President Nixon decided to exit America out off the gold standard back in 1973. The first among it is to hedge against inflation, to use it as a safe haven against economic uncertainty and also towards hedging against stock market crashes. These three reasons played out explicitly in 2011 when concerns over the US congress unwilling to rise the debt ceiling while simultaneously default on its debt. These situations have been the norm ever since modern economics took over world trade and finance structures. In 2000 for example a bull market for gold was spurred when investors reacted to the Y2K crisis which was not founded on anything solid, but rather pure sentiments as fears of the stock market tech bubble bursting became a grave issue. Another bull run for precious metal took place after the 9/11 attacks as economic uncertainty loomed and fears of inflation gripped investors causing the dollar to decline from 2002 right up to 2006. Another ‘gold rush’ was initiated in 2008 as ‘quantitative easing’ made investors uneasy and the rush towards gold was augmented when Obamacare was on the horizon when economic growth was to slow for comfort (Amadeo, 2015).

However as 2012 approached and uncertainty dissipated and economic growth began to stabilize by over 2%, the stock market recovered beyond expectations as index rose above that of 2007. Looking into all these events that have transpired it is profoundly clear that that when stock markets rise, gold prices fall and when stock markets fall, in most case scenarios prices of gold will increase. Based on logical assumptions, there has not been a threat of inflation of above 4% since the advent of the 90s that has given investors a forceful raison d’être to purchase precious metals, particularly gold. The current situation of the falling Chinese market coupled with the possibility of exit by Greece from the Euro raises doubts among investors who have not flocked towards gold just yet as they observe the markets cautiously.

Logical Assumptions

From the very beginning of the 80s right up to 2004, the prices of gold hardly got over $500 an ounce and the ballistic rise to the current highs was not only the result of the worst recession since the great depression but also due to the fall in the value of currency, most people are under the impression that the prices of gold has risen by more than a 100 % since the 90s, without realising the fact that what could be purchased the 90’s with $500 is equivalent to what can be purchased now for $1000 in general, this only means that the prices of gold in terms of ‘currency value of the 90s’ has risen by $100, nothing more. Another factor that must be taken into consideration as to why investors are not flocking to gold over the last 2 weeks is also due to the stability of most other economies, although faltering slightly, they are not even close to the red zones, as a matter of fact, investors are looking forward for gold to return to its historical levels which should be based on the current currency value, about $1,000 an ounce or slightly below.

Gold Mechanics

Most portfolio managers would advise to keep gold investments at around 10%, however a well diversified portfolio should essentially have around 20 % in an assortment of precious metal investments (gold, silver, platinum and palladium). Based on historical data the highest price gold ever touched was when the prices of gold hit $1,895 on the 5th of September, 2011 before meeting resistance and sliding back to where it is now. As mentioned earlier conditions in the stock and bond markets have a direct impact on the prices of gold and thus, gold can be considered as a good economic health indicator, meaning when the prices of gold is on a rise trajectory it simply indicates that the economy is not too healthy and when the prices of precious metals drop it is an indication that the economy is progressing well due to the fact that investors typically leave gold for other investments that have a higher R.O.I (Return on Investments) such as stocks, bonds or real estate. The mechanics of precious metals are unlike most other commodities and are not exceedingly affected by supply and demand due to the fact that the amount of gold in stock is 60 times more than the annual amount of gold that is mined which means that the ups and downs in the mining industry do not have significant enough affect on supply not forgetting the fact that 26% of supply is recycled when it comes to gold and as gold prices go higher, the amount of recycled gold also climbs.