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Golden inflation: Is Gold making a comeback in Trading?  

When the world’s political and economic situation becomes more complicated, gold is often perceived by investors as so-called “Safe haven,” where they can wait out those difficult times. So it was in 1980s, a period rich in numerous conflicts in the world – especially in the Middle East, where stability has been upset by the Iranian Islamic revolution of Ayatollah Khomeini and the invasion of the Soviet Union in Afghanistan. International tensions were exacerbated by the kidnapping of American diplomats in Tehran, which brought the threat of direct involvement of the United States’ military. All these factors in the first place pushed up – of course – the price of oil, transported from the destabilized regions. The value gained from “Black Gold” became a tradition. Taking into account inflation, gold bullion reached its peak of $2,300, setting an all-time record, beaten only three decades later. Geopolitical risk, however, is not the only factor, which caused then such sharp increases in the price of gold. Many experts also point out to the runaway inflation plaguing the United States in the early 80’s of the last century. Reaching the threshold of 13% (the highest level since the end of World War II), has discouraged many investors from investing their capital in government bonds and undermined the credibility of the dollar.

 

Thus, gold has become one of the few assets that allowed to obtain a satisfactory rate of return on investment – that could reach up to 3750%, assuming the hypothetical use of CFD, with an increase in the price of gold by around 300% (from the end of 1978 to the beginning of 1980).

 

Assuming a hypothetical possibility of investing in gold CFD, this market move, with minimal security deposit at 8%, would make it possible to open a long position with a nominal value of $1,000,000 with a deposit in the amount of $80,000. With this involvement of capital, a customer would gain $3,000,000, investing only $80,000, and that means more than 37-fold increase in the value of the portfolio (3750%).

 

Of course, predicting the scale of that movement, and thus investing in bullion at the beginning of the “gold rush”, would be quite difficult, nevertheless taking advantage, even in part, of the trend through CFD, would have brought above-average returns.

 

 

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Also in the XXI century, gold was able to surprise investors. Although most analysts expected in 2013 the further appreciation, the royal metal showed a reverse trend ending the fourth quarter with 28% decrease in value. Scale of surprise was such that this, not so shocking after all, forecast prepared by Saxo Banks analysts has been considered in the economic fiction category, rather than reality. In fact, it was mainly the political fiction that was responsible for the decrease in value. Central banks, and in particular their PR departments, managed to convince the market that the Euro-Atlantic economy is doing great and in the subsequent years will be experiencing unprecedented prosperity. Investors naively believing in the optimistic rhetoric used by politicians, were getting rid of the gold to the other assets in the hope of a better economic situation. This prosperity was to be provided by so-called non-standard monetary policy, involving a maximum reduction of interest rates and bulk purchases of assets, in particular government bonds. This procedure, according to the classical approach to economic processes, should lead to an oversupply of money, and thus an increase in inflation. It has become quite the opposite, which only heightened aversion to gold. This procedure, according to the classical approach to economic processes, should lead to an oversupply of money, and thus an increase in inflation. It has become quite the opposite, which only heightened aversion to gold.

 

According to central bankers, investors could gain only 33 per cent in nominal terms. However, assuming a hypothetical possibility of investing in gold CFD, this market movement, with minimal security deposit at 8%, would make it possible to open a short position with a par value of $1,000,000 with a deposit in the amount of $80,000. With this involvement of capital, a customer would gain $330,000 investing only $ 80,000, and that means more than 4-fold increase in the value of the portfolio (412%).

 

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Summary

In the ranking of the epochal economic events changing the face of the global economy, the greatest return on investment would have been undoubtedly ensured by stock market declines associated with the Great Depression in the beginning of the 20th century and a sudden gold value increase in the 80’s. If the then investors had had access to Contracts for Difference, their capital would have increased 45 or 35 times, respectively!

 

Contemporary economic breakdowns – at least so far – cannot compete with economic tremors besetting the world in the last century. It should be kept in mind that this is only the beginning, and the uncertain geopolitical situation and the escalating conflict between the civilization of the East and the West, may result in unimaginable changes that will outclass the greatest recessions of the twentieth century. This time, however, thanks to modern financial instruments, they can be tamed.

 

 

About Saxo Bank:

Saxo Bank is a global investment bank specializing in online trading and investment across the international financial markets. Saxo is serving a client base spread across more than 180 countries. It provides its products and investment platforms in more than 20 languages. Established 1992, Saxo Bank gives private clients and institutional partners control over real-time investment transactions on the Forex capital market.

Saxo Bank is an award-winning financial institution that during 20 years of its operation has received 30 prestigious awards, including six awards in 2011 as part of the annual Euromoney FX Poll. For the fifth year, Saxo Bank won FX Week’s Best Bank for FX for Investors and Best FX White- Label Liquidity Service.

The headquarter of the institution is located in Copenhagen. Saxo Bank has offices all around the world, including London, Paris, Geneva, Zurich, Singapore, Tokyo, Madrid, Amsterdam, Dubai, Prague and Beijing. From 2012, the bank operates in Warsaw.

For more information visit: Saxo Bank