By Bhavesh Agarwal, Class 10, Dhirubhai Ambani International School, Mumbai
The past few weeks have been a turbulent time for markets. Rallies and crashes occurred frequently depending on the headlines that day. However, the price of one commodity steadily increased, gold.
Gold is seen as a safe haven by investors across the world. When everything else is uncertain, just invest in gold, you will be taken care of. This mentality is reflected in the price of gold which has been skyrocketing. It even crossed the mental barrier of 50,000 INR. Let’s talk about the reasoning behind this.
Over the years, humanity has placed their faith in this shiny metal. We have been attracted to it since forever. There is a charm to that metal. Currencies have come and gone but the value of gold has never eroded.
There is historical evidence that gold was used as a medium of exchange. Why? Because gold has intrinsic value, something which fiat currency lacks. The concept of fiat currency is that the government assures that the money they issue will retain value. However, gold does not require a central authority to convince us of its value. Its visual appeal does the job.
For years, gold has been a symbol of riches and prosperity. The value of an object increases manifold once plated with gold. It is used in earrings, necklaces, bangles and is even studded in watches. Gold has become a status symbol for many and it does not seem like that’s changing anytime soon. Thus, it shouldn’t come as a surprise that it has attracted investors. It is seen as the perfect risk-free, liquid investment. People even use it as a hedge against inflation. It is viewed by many as an investment that generates steady returns without taking on significant risk. Now, there is some truth to that statement but it is also necessary to view the flip side. Data doesn’t lie. Look at the national indices of any country and compare its price with that of gold over the last 40-50 years. There is a good chance that equity significantly outperformed gold. However, the growth rate wouldn’t be stable. A characteristic feature of the stock market. The main question is whether people can stomach the massive market gyrations that typically occur in equity. The answer in many cases is no. Thus, the outflow from equity and inflow to gold. When the times get tough, many are unable to bear it and choose to shift to a safer option. Historically, during crises gold prices have risen and continue to do so. In my opinion, the price increase should not be viewed as an indicator of economic revival but as a measurement of public sentiment. The more the public fears the future, the larger the rise in gold. Thus, we should be very careful when analysing gold prices. We need to focus not only on the number the market arrives at but also the reason why it does so.