I personally find buying GOLD a very amusing investment option. The reason for this is that apart from the small amount of GOLD required in industry, this commodity or metal is not really that useful for the economic devlopment. The majority of demand for GOLD comes from people hoarding GOLD either as an investment or for jewellery. This makes me wonder - Demand for things like jewellery/clothes depend a lot on latest fashion. If suddenly GOLD jewellery goes out of fashion, and something else, like say jewellery of some superb synthetic material comes into fashion, will cause GOLD prices to plummet?
At this point of time however, may be because of the status associated with GOLD jewellery, this may not be a cause for immediate concern although i would always feel uncomrtable to put all my money into GOLD. Nevertheless GOLD is a very useful investment option and having GOLD in your portfolio can certainly make your portfolio more robust. To understand that let us first understand the factors affecting GOLD prices.
- High Inflation: In times of high inflation, people tend to invest in commodities, GOLD being the most popular among all commodities. This is also the time when the economy and stock market or mutual fund investments do not do well and GOLD investments can provide a good hedge for your investment portfolio.
- Low interest rates: This is somewhat similar to the above factor. When the interest rates are low (as compared to the inflation), especially less than the inflation, then the demand for GOLD increases.
- Human sentiment: This is an irrational but significant and the most difficult to predict factor which can influence the price of gold. Because of this factor it is also easier to have 'temporary GOLD bubble'.