There are various reasons why people invest in gold to meet their financial goals. However, there are those that invest in gold for the wrong reasons.
By doing this, they end up with an unsuitable investment product which can put their financial goals in jeopardy. Here are five right reasons why one should have gold in their investment portfolios.
Hedge against inflation
When inflation rises, the value of currency goes down. Over the long term, almost all major currencies have depreciated in value relative to gold. Therefore, people tend to hold money in the form of gold. In times when inflation remains high, especially when it is in high double digits, over a longer period in the economy, gold becomes a hedge against inflationary conditions.
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 misuse, gold is free from such concerns. However, it does come with its own risks. So, be mindful of them.
For portfolio diversification
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. Still, as a rule, gold shows no statistically significant correlation with mainstream 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.
At the time of need, investments in gold can be liquidated much faster than other physical assets like real estate. Unlike many other assets there is no lock-in period in gold investments except for sovereign gold bonds. The redemption amount in case of physical gold will, however, depend on the purity of the gold, denomination and other factors including the market price.
In the case of the paper gold, the market price on the redemption date determines the redemption amount. When short of funds, one may also take loans against gold.
Geo political factors
Gold usually does well during geopolitical turmoil and the current crisis over Korea’s nuclear capability has boosted the prospects of the yellow metal. Prathamesh Mallya, Chief Analyst, Non-Agri Commodities and Currencies, Angel Broking writes
here, “Gold prices have been trading in $1,300-1,360 for 2018 despite the rolling geo-political uncertainties. Although the tensions have eased, $1,300 will act as a psychological support. On MCX, Rs 31,000 will act as a good support in the domestic market, Crises such as wars, which have a negative impact on prices of most asset classes, have a positive impact on gold prices since the demand for gold goes up as a safe haven for parking funds.”