You know an investment is hot when people are going on the radio and asking you to melt down your jewelry so they can get in on the action.
Gold has been on a bull run for more than a decade. In May 2001, the price of gold averaged $272.36 per ounce. On Sept. 15, 2016, it closed at $1,318 per ounce, an increase of nearly 400%.
But what’s behind those gains is a more complex question, says Tom Winmill, portfolio manager for Midas Funds in Indianapolis. That’s because gold performs 2 distinctly different functions. It’s a commodity and a hedge against inflation, and its importance in both roles has grown significantly in the last 10 or more years.
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Gold, the commodity
Gold is a consumer good and is used in the production of other goods. Consumer jewelry, electronics, medical devices and other products consume about 10% of the world’s gold every year, Winmill says.
Nowhere is that more evident than with jewelry. Cameron Brandt, director of research at Emerging Portfolio Fund Research in Boston, says part of the rise in gold can be attributed to increased demand for gold jewelry in the developing world.
As developing countries, particularly India, have matured economically, demand for gold jewelry there has increased substantially. At the end of 2015, gold jewelry made up 57% of gold demand, 60% of which was from India and China, according to the World Gold Council.
Gold also plays a major role in electronics. Most electronic devices contain a small amount of gold, and as electronic devices have become more popular, gold use has increased, Brandt says.
Gold, the inflation hedge
While gold’s role as a commodity has had some influence over its price, its other role has accounted for most of gold’s rise in value, Winmill says. Investing in gold is a hedge against inflation and a safe harbor for investors worried about political and economic instability.
Winmill says the buzz surrounding gold also has added to its allure.
“There’s been a lot of discussion of gold, a lot of additional investment in gold. We’re seeing a lot of retail interest in gold in terms of the ETF (exchange-traded funds),” Winmill says.
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