Why Is Gold Safe To Invest In Despite Market Pressures?

Gold continues to fare better than other asset classes in spite of a downward pressure on prices.

Gold prices declined in most currencies from April through June this year. Gold fell 3.8 percent to $1,598.50 oz on the London PM Fix, a key index of daily gold prices, during the second quarter. However, prices were up 4.4 percent during the first half of this year. On Wednesday mid-afternoon, the price of gold was $1,581.50. Almost one year ago, the price of gold was $1,891.

Gold prices fell because of a drop in the prices of energy and agricultural commodities -- a trend that is easing inflation in many parts of the world, according to a recent investment report from World Gold Council.

While gold is facing some pressure, other risk-free or low-risk assets traditionally considered as "safe havens" are at greater risk.

Interest rates on German bonds climbed last month. Meanwhile, yields on U.S. Treasury bonds are falling. Yields on two-year notes dipped to their lowest level since late January on bets that the Federal Reserve would undertake further stimulus measures. The continued rise in the value of the Japanese Yen, seen as a safe vehicle by many investors, could make Japanese assets less competitive in the global market too.     

Despite market pressures on prices, gold will continue to serve as an effective conduit for investors who wish to preserve capital or diversify the risk in their portfolios, economists say. Gold is desirable for long-term investors especially because of its high liquidity and relative lack of credit risk. It also provides investors ample leeway as a hedging mechanism -- a feature that will come in handy if the U.S. dollar faces pressures in the wake of a $1.3 trillion budget deficit and the presidential elections in November.  

The fiscal and monetary policy stimulus measures under way in most countries facing varying levels of deflation are expected to support future investments in gold by devaluing currencies and eventually opening economies up to a mild inflation.

The currencies where gold prices remain unaffected are the euro, Swiss franc and the Indian rupee, because they have weakened against the U.S. dollar.

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