Why are gold prices moving up despite a global economic recovery?

The investible potential of 'Gold' as an asset class has been a function of jewelry & industrial demand, inflation outlook, strength of the dominant currency, geo-political stability and the gold supply variable. Given the historical and contemporary pervasiveness of gold as a store of value, and to a certain extent, medium of exchange, gold has adopted a tendency of behaving like a natural currency. Therefore, the investment demand for gold tends to rise in the case of adverse economic condition, rising inflation, weakening dollar, or general socio-political instability.

The 16.26% cagr run-up in the gold prices since 2000 has largely been attributable to the surfeit liquidity in the early part of the decade, while in the latter half, the turbulent economic conditions post the sub-prime crisis, contributed to the gold rally. However, despite the teetered recovery in the global economic environment, the optimistic outlook on gold remains unchanged. And here's the reason why!

Today's geopolitical climate has become increasingly volatile. The pursuit of nuclear arms by autocratic regime(s) was already a driving force for gold investors. This uncertainty has increased further on account of domino effect in the Middle East and North African region, where long standing regimes stability has come into question.

All the more, the political instability in this vital region has also caused a sizeable spurt in a correlated commodity - Crude oil. The spot prices in crude brent have spiked by nearly 44% in the last 4 months and is showing no signs of respite. The inflation in one of the most essential commodities is expected to provide further fillip to price growth in gold.

Correspondingly, world's major economies continue to be burdened with extensive amounts of debt to keep their economies afloat. To add to that, the economic hardships of Western Europe haven't gone away either. Also, while the U.S economic performance has improved, the unemployment situation continues to remain difficult.

Consequently, while the global investor sentiment has improved, the relative risk perception remains. This in-turn is fueling the investment demand for gold.

Also, traditionally, the gold demand has a seasonal flavor to it. The onset of marriage season in India, the corresponding gold inventory expansion by US and European retailers, all provide demand push to gold. Besides, central bankers worldwide are also emerging as the net buyers of gold. The interplay of these factors provides a potent case for investment in gold.

But, from a retail investor point of view, the physical investment in Gold has a minor side-effect. Buying physical gold involves the risk of theft, misplacement and potential wrong-pricing. Additionally, when an investor needs to sell his physical gold, again at that point, the investor has to go through the inconvenient route of valuation, bargaining, transaction and delivery

All these angles involve risk, skill, and time - making the whole process inconvenient. But thankfully an alternative method to investing in Gold exists