India’s love affair with gold is not new. As per the World Gold Council’s (WGC) 2018 annual report, India is the second largest consumer of gold and the holder of the largest stock of gold, with about 598 tonnes with RBI and a record high of about 23,000 tonnes of gold stocks are hoarded by the Indian households.
If you are an investor who is looking for something safe with high liquidity, then gold is definitely a good investment option for you. Take a look at the benefits:
- Gold has an inflation beating capacity. Over a period of time, the return on gold is in line with the rate of inflation.
- Gold and equity have an inverse relationship. If the equity markets start performing badly, then in all probability gold would perform well. Gold, as part of your investment portfolio, will act as a buffer to the overall volatility of your portfolio and help you avoid financial disasters and cut losses.
- Gold is a highly liquid asset that can easily be converted into cash and can be passed from one generation to the next as a legacy and symbol of family wealth.
It can also help you get over the counter ‘interest only Gold loans’ up to 75% of the value of your gold offered by many financial institutions. Such loan options allow you to get back your pledged gold anytime by paying off the principal amount.
- Gold is a universal commodity. A gold ornament is as valuable in the US as it is in India.
How to invest in gold
Traditionally, one can buy in gold the form of ornaments, coins, bullion and artefacts. Buying gold as jewellery serves the twin purpose of having an investment security as well as a matter of prestige.
Nowadays, there are other advanced options for gold investment like the Gold ETFs (exchange-traded funds) and Gold Funds. Gold ETFs are similar to investing in physical gold without having the hassle of securely storing the physical gold. There is no danger of theft as the gold is kept in demat/paper form. Gold funds involve investing in gold-mining companies.
How does it compare to the currently popular Mutual Funds investment?
Investing in gold offers lesser returns and no dividend as compared to equity mutual funds. But gold is a safe investment and comes with a very low market risk as compared to mutual funds. Gold must be looked as a diversifying investment, something that will keep the investment secure and steady as its not related to stocks and bonds.
Internationally, gold may not be the primary currency any more but it is still vital to the worldwide economy. That’s why the central banks of both developed and developing banks, International Monetary Fund (IMF) and other such institutions together hold stock of around 1/5th of over-the-ground gold.
Safe haven and asset of last resort
No matter what the conflicting theories may be about whether gold is a good or a bad investment (‘dead metal’ as Warren Buffet calls it), the fact is that everyone likes to have this precious metal in their kitty. Even the most aggressive investment consultant will advise you to invest about 10% of your total portfolio in gold to maintain stability.
To conclude, invest in gold as a hedge against inflation and equity market, make it a part of your portfolio as a diversification instrument, think of it as your ‘emergency fund’, and enjoy the beauty and the feeling of prestige that comes with holding gold in its various forms. There is a steady rise in the year-on-year global demand for gold as per WGC reports and hence it makes for a good long-term investment option.
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