15 January 2020 (closed)
USD/IDR (13,648) -10.00 -0.07%
EUR/IDR (15,206) -24.81 -0.16%
Jakarta Composite Index (6,283.37) -42.04 -0.66%
For some Indonesian investors, trends in the precious metals markets might seem difficult to understand. This is often because changing valuations are often based on external events that are not directly related to the Indonesian economy. But when we look at the global factors that typically create rising and falling price moves in the precious metals, it becomes easier to find ways of positioning investments for what is likely to come next.
Safe Haven Features
The two most commonly traded precious metals are gold and silver, and these two assets tend to perform in largely similar ways over the same period of time. Gold tends to get more media attention, however, and this translates to much higher trading volumes in the active market. Gold tends to influence the price trend in silver but both assets are generally viewed as valuable for the safe haven characteristics they offer investors.
Long-term Price History in Gold
In the chart above, we can see that the average gold value (inflation-adjusted and priced in US dollars) tends to perform best in cases where financial instability is gripping the market. For example, rising global inflationary pressures in the 1970s led investors to look to gold as a protective alternative investment. This brought the value of gold to what was then an all-time high for the asset. Prescient investors that were able to identify these trends in inflation could have brought into gold markets before the rallies had reached a completion point -- and captured all of the profits in the process.
One important element to remember is the fact that gold is usually priced in US dollars, and this can create scenarios where the value of gold tends to work in a trend direction that opposes what is currently being seen in the US dollar. These two assets share an inversely-correlated relationship, so when we see the value of gold rising it will often mean that the value of the US dollar is falling (and vice versa).
So when you are looking to place an investment as an Indonesian investor, these are some of the factors that should be considered so that you can determine the most rational bias for the current market environment. In some cases, extra research steps are involved because some of these relevant factors are not directly to the performance of the Indonesian economy. But when we look at the factors that have influenced these markets for several decades (or more), it becomes much easier to structure your investment positions in these areas.
This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.