Jewellery fabrication
The largest source of demand is the jewellery industry. In recent years, demand from the jewellery industry alone has exceeded Western mine production. This shortfall has been bridged by supplies from reclaimed jewellery and other industrial scraps, as well as the release of official sector reserves. Gold’s workability, unique beauty, and universal appeal make this rare precious metal the favourite of jewellers all over the world.
Industrial applications
Besides jewellery, gold has many applications in a variety of industries including aerospace, medicine, electronics, and dentistry. The electronics industry needs gold for the manufacture of computers, telephones, televisions, and other equipment. Gold’s unique properties provide superior electrical conducting qualities and corrosion resistance, which are required in the manufacture of sophisticated electronic circuitry. In dentistry, gold alloys are popular because they are highly resistant to corrosion and tarnish. For this reason, gold alloys are used for crowns, bridges, gold inlays, and partial dentures.
Governments and central banks
The third source of gold demand is governments and central banks that buy gold to increase their official reserves.
Apart from its applications, the most important reason for owning a gold is diversifying risk. Gold is an excellent portfolio diversifier since it has very low correlation with other assets. Therefore, the yellow metal is one of the most effective hedges or safe havens. Gold can be seen as an insurance against tail risks, financial black swans, high and accelerating inflation, or systemic crises.
Below are practical reasons to think about owning some gold today.
Inflation Hedge
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years. This is because when fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to arise along with everything else. Moreover, gold is seen as a good store of value so people may be encouraged to buy gold when they believe that their local currency is losing value.
Portfolio Diversification
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
Most portfolios are invested primarily in traditional financial assets such as stocks, bonds and mutual funds. Adding gold to a portfolio introduces an entirely different asset; a tangible or real asset, thus increasing the portfolio’s degree of diversification. The purpose of diversification is to protect the total portfolio against fluctuations in the value of any one asset or type of asset. Gold does exactly that.
The price of gold, on the other hand, depends on different factors
Worldwide physical supply and demand for gold, movements in foreign exchange rates, inflation, interest rates and political turmoil. The effects of all these factors are somewhat complex and variable. But the important point to remember is simply that they cause the price of gold to move independently of the prices of financial assets.