Is gold a good investment?
It’s natural and even prudent for an investor to wonder if a particular asset is a good investment or not. That’s especially true for gold, since it’s an inert metal and doesn’t earn any interest.
Let me tell you that gold continues to be a popular investment for ages. It has been respected all over the world for its value and rich history.
People have wanted to hold gold for various reasons. With various innovations, gold trading has evolved from physical gold to virtual trading. However, all forms of gold are equally attractive for investments.
There are various reasons why people, especially Indians, invest in gold to meet their financial goals.
However, there are those that invest in gold for the wrong reasons.
Here are the top 10 reasons why every investor should have gold in their portfolio, with an emphasis on investment implications.
Here are 10 right reasons why one should have gold in their investment portfolios.
Gold is not used as a currency today, but its role as money makes it superior to any currency.
In fact, gold has been money longer than any currency in history. Gold has been a store of value for at least 3,000 years, while one of the longest currencies in history, the British Pound Sterling, is about 1,200 years old.
One of the crucial promises of money is that it serves as a long-term store of value. Gold fulfills this promise better than any currency. Look how much purchasing power all major government currencies have lost compared to gold.
Since 1900, physical gold has been the best long-term store of value.
There were periods wherein the short-term currencies grew in value more than gold, but over the long-term, this chart demonstrates exactly why the rich have always held it in their investment portfolio.
If you hold gold, no paper contract is needed to make it whole. No middleman or other party is necessary to fulfil a contractual obligation.
That’s because gold is the only financial asset that is not simultaneously some other entity’s liability.
This is important because gold will be the last man standing when bubbles pop or a crisis hits. That’s a powerful tool to have in your portfolio when things start to go wrong in your country or economy.
It also means gold won’t go to zero. It’s never happened in its 3,000+ year history.
Gold will always have value. You can always sell it if you need currency.
The hedge against inflation is the traditional motive behind the investment in gold. The yellow metal serves as an inflation hedge in the long run.
When inflation rises, the value of the currency goes down. Over the long-term, almost all major currencies have depreciated in value relative to gold.
But gold prices have doubled over the last five years and quadrupled in a decade.
In a country like India, where every saving instrument may not provide returns, gold fares well when the inflation rate exceeds the interest rate.
Likewise, the annualized return of gold over ten years has been way higher than that of inflation. What this means is that gold has given individuals a real rate of return.
Gold is one of the few assets that is tangible, and thus, it creates a perception of safety among investors.
Purchasing gold is much easier compared to purchasing other tangible assets such as real estate.
Also, because of this feature, while assets stored digitally are prone to hacking and other misuses, gold is free from such concerns.
However, it does come with its own risks. So, be mindful of them.
Gold is also ideal because it is easy to sell and can be carried in your pocket anywhere you go.
Gold is highly liquid. Virtually any jewelry dealer in the world will recognize gold and buy it from you. You can sell it to your local coin shop, a pawn shop, a private party, or an online dealer. It can always be sold for cash or traded for goods.
The process is frequently quicker than selling a stock in your brokerage account.
It usually takes 3 business days for settlement before cash can be transferred to your bank account or a check mailed.
And other collectables, like artwork, could take longer to sell, have a smaller customer base and would likely entail a big commission. But with gold, you can get cash or goods in hand on the spot with no hoops to jump through.
This liquidity means you can take gold with you literally anywhere in the world. And if you’re uncomfortable crossing a border with it, you can buy gold you can transport.
Can you spot a real diamond?
Can you look at two paintings and tell which one is fake?
Can you pick stocks or invest in other financial securities of your own knowledge alone?
Gold investment requires none of this. No special skills, training, or equipment are needed to buy or recognize gold.
Unlike stocks, bonds, cryptocurrencies, real estates, among a series of other investments, gold requires no specialized skills. As an investor, all you need to do is simply buy and store your gold.
There are no tedious charts to compare all day long, or trading bots to trust with your investments.
Buying gold is relatively straightforward.
One of gold’s strongest advantages is that it can protect your investments, even your standard of living, during periods of an economic, monetary, or geopolitical crisis. And depending on the nature of the crisis, gold can move from a defensive tool to an offensive profit machine.
Many investors use gold in times of financial distress.
The Indian Government itself airlifted national gold reserves to pledge to the International Monetary Fund (IMF) in the early 1990s, to cover the balance of payment debts.
Households also sell or pledge the precious metal in times of financial distress. It is a refuge in times of trouble.
It is believed by some economists that gold is a highly effective portfolio diversifier due to its low to negative correlation with all other major asset classes.
However, some suggest that there is evidence that when equities are under stress, in other words, when shares are falling rapidly in value, an inverse correlation can develop between gold and equities.
Gold protects one’s portfolio from volatility because the factors, both at the macro-economic and micro-economic fronts that affect the returns of most asset classes do not significantly influence the price of gold.
For a given level of returns from a portfolio, the risk or volatility can be reduced by adding gold to it.
Gold as an investment offers dual benefits of risk-reduction and wealth creation.
Even if there is no economic crisis or geopolitical tensions, the precious metal can still give decent returns in the long term.
Its past track record has already proven that. In case there is an economic or political shock, gold as an investment provides the perfect investment hedge, against capital losses from equities.
In case the local currency of an economy sees any major fall owing to macro-economic factors, gold provides investors with a cushion.
When India’s currency remained under acute pressure in 2013-2014, all major global currencies still managed to support gold price in rupee terms.
Gold’s qualities make it one of the most coveted metals in the world and a popular gift in the form of jewelry.
The decline of paper investment leads to an increase in the price of gold and hence gold is the perfect investment to make if you wish to diversify your portfolio.
In the short term, gold prices can be volatile, but it has maintained their value over the long term. If you are planning on investing in gold, make sure it is for the long term.
Investing in gold is worth considering.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.