Should You Buy Gold as an Investment?

Buy Gold as an Investment

For generations, gold has been a valued commodity. Gold has been used as a currency and a symbol of riches and power throughout documented (and unrecorded) history. Gold has been discovered buried among skeletons dating back to 4,500 B.C.E. in gravesites.

This long-term value indicates gold's consistency and desirability throughout time. Investing in gold is considered to be one of the safest investments, as it quickly recovers its value during economic downturns. Its price often moves in the opposite direction of the stock market or economic fluctuations.

When investor confidence is shaken, gold prices generally rise as worried investors seek a haven for capital removed from the market. In times of inflation, gold is also a haven since it holds its value far better than currency-backed assets, which may arise in price but fall in value.

Why Invest in Gold?

Most risk-averse investors search for three things before investing: safety, liquidity, and a good return. While gold acquits itself admirably in the first two criteria, it falls short in the third. The following are some of the reasons why invest in gold:

  • Gold is a worthwhile investment since it outperforms inflation. Gold investment returns have tracked inflation over time.
  • Gold and equities investments are opposed. Gold, for example, would do well if equities markets began to decline. Including gold in your investment portfolio will act as a hedge against overall portfolio volatility.

What are the Advantages of Investing in Gold?

It's natural to ask why to invest in gold in these times of economic and political uncertainty. Gold is a popular investment because of its numerous benefits. The following are some of the elements that make gold an excellent investment:

Liquidity

Liquidity is the first factor to consider. Almost anywhere in the globe, gold can be converted into cash. Even if you purchased your gold earrings, rings, necklaces, or other trinkets in India, they are worth the same worldwide. Apart from money, gold's universality and liquidity are unrivalled. Gold is also a store of value that retains its value over time. It's crucial to remember that gold's price does not reflect its worth. This means that even if gold prices fall, its intrinsic worth remains stable. Currency, unlike gold, which is a valuable physical item, has no inherent value.

Inflation

Gold is also one of the strongest inflation hedges. When prices rise due to inflation, gold's value increases as well. This means that, in the face of inflation, gold is a more stable investment than cash.

Diversity

Another benefit of investing in gold is the diversification it provides to your portfolio. Having a diverse portfolio of assets reduces your overall risk. Gold also diversifies your portfolio nicely due to its inverse link with currency and stock values.

Universal Commodity

The fact that gold is a globally desired investment qualifies it as a universal commodity. The political unrest has impacted the security of several countries throughout the world. The value of gold, on the other hand, is unaffected by such circumstances.

Demand that Never Stops

Another benefit of gold is that it is in constant demand throughout the world. Its widespread use in a variety of products, including jewellery and electronics, ensures high demand. Gold's price stabilizes and improves as a result of this increased demand. In addition, as demand grows, the markets may raise the price. For all the right reasons, gold is in the financial spotlight. Perhaps this is why many investors regard gold to be a sound investment.

What are the Drawbacks of Investing in Gold?

Although traditional knowledge holds that gold is the panacea for inflation's surging prices, its track record is skewed. It has a lot of benefits, but it also has a lot of disadvantages and hazards.

Before you consider investing in gold, keep in mind that it does not provide any form of passive income. You will not receive dividends or interest from gold as an investment, unlike other types of assets such as stocks or bonds. The only way to profit from gold is to sell it at a higher price as its value rises over time. Another issue is the amount of physical storage space it necessitates. Many investors are put off from purchasing gold as a result of this. The added cost of insuring gold against damage or loss is also a disadvantage.

How to Invest in Gold?

Buying physical gold in the form of billions, coins, artefacts, or jewellery was the traditional method. The newer types of gold investing are gold mutual funds and gold ETFs (exchange-traded funds).

Gold ETFs are similar to purchasing the same quantity of actual gold without the hassle of storing it. As a result, there's no danger of theft or break-in because the gold is kept in Demat (paper) form. Gold funds are used to invest in gold mining companies.

Let's look at the following table to see how to invest in gold in many ways:

Physical goldGold ETFs (Exchange Traded Funds)Gold Funds
Investing in goldThe investor purchases a certain amount of gold, but not in its actual form.The money is invested in gold bullion and gold mining enterprises.
There is no requirement for a Demat account.A Demat account is required for the investor.To invest, you don't need a Demat account.
Gold prices are directly affected by market changes.Gold ETFs are affected by changes in gold prices.Changes in gold prices have no direct impact on gold ETFs.
Other than the real gold, there are no further fees.Asset management and brokerage expenses are associated with gold ETFs.There is a nominal fee for managing gold funds.
Storing physical gold carries the risk of robbery and burglary.Gold ETFs eliminate the need to trade gold in its physical form.Reduces the risk of theft or burglary and protects assets from market volatility.
Investing does not necessitate any documentation.Investing in gold ETFs necessitates the completion of paperwork.Investing in gold funds necessitates the completion of paperwork.
There isn't a Systematic Investment Plan (SIP) available.There is no SIP option available.There is a SIP option available.
Suitable for traditional investors.Investors with the time and skillset to trade should consider this option.Best for those that want to make a profit by taking reasonable risks.

What are India's Best Gold Funds?

Some of the best gold funds to consider investing in, depending on the market situation, are:

  • Axis Gold Fund
  • Aditya Birla Sun Life Gold Fund
  • Canara Robeco Gold Savings Fund
  • HDFC Gold Fund
  • ICICI Pru Regular Gold Savings Fund

When is the Best Time to Buy Gold?

When the economy predicts inflation, the most significant moment for investing in gold is when the national currency's value is expected to fall. If you can foresee such drops early on, you can make more money. Top signs, such as a collapse in the stock market and political unrest, could point to further depreciation of the national currency. Aside from that, the reserve bank's announcements to issue more local currency may signal an ideal moment to invest in gold.

Even if the local currency is strong and inflation is unlikely shortly, there are few odds of a price increase. However, if you anticipate an increase in market demand from industries that require gold, price pressure could result in a price increase. The jewellery and electronics sectors are two examples of industries that make up the market. In other words, the most incredible time to buy gold is when the price is low. And this is true regardless of the country's political and economic situation.

What do you Mean by Gold Investment?

Although there are many other precious metals, gold is widely considered to be one of the best investments. Due to various influencing characteristics such as a high degree of liquidity and the ability to exceed inflation, gold is one of the most recommended investments in India. Coins, bars, jewellery, gold exchange-traded funds, sovereign gold bond schemes, gold funds, and other forms of gold can all be purchased. Although markets occasionally see a decline in gold prices, it rarely lasts long and always rebounds to a definite upward trend.

Investing in Gold to Enhance your Portfolio. How?

The best way to look at an asset class is from the standpoint of its allocation in your portfolio. One of several reasons for assigning assets to various asset categories in your portfolio is that, in an ideal world, asset classes would have a negative correlation, allowing your portfolio to remain balanced.

In actuality, there is no such thing as a negative correlation, although a low positive correlation is preferable. As a result, your portfolio will be less volatile, as all of your investments will not rise or fall simultaneously. The idea for investing in gold is the same: allocate specific funds to it so that your portfolio's volatility is reduced to that level, i.e., low positive correlation with other assets. The advantage is that risk-adjusted returns, or returns adjusted for volatility, will be significantly higher.

Gold allocation in your portfolio should be based on your profile, investment objectives, and investment horizon. Still, it should be kept to a minimum and should not make up a significant portion of your portfolio. The most frequent asset classifications are debt and equity; equity is designed for long-term wealth production as well as economic expansion; debt is designed for short-term wealth generation and relatively stable returns. If you have some gold in your portfolio, you will have less overall volatility than if you had stocks and debt.

What Is the Right Amount of Gold to Put in your Portfolio?

Purchasing gold is a long-term investment. In the long run, it pays off. Although there is no one-size-fits-all rule for how much gold should be in your portfolio, it is highly dependent on the market. It also depends on your comfort level with the market's volatility, your financial requirements, and your investing schedule. Ideally, it would be best to acquire gold using the same tactics you use to manage your portfolio when purchasing other investments. The best gold asset allocation in your 'investing in gold' strategy will come from careful study and planning.

When compared to many other possibilities, gold is a desirable and often profitable investment. However, it is essential not to get carried away when purchasing valuable yellow gold. Gold can be purchased in a variety of ways. Gold can be bought directly or in the form of various gold securities. Before you invest, make sure you understand your alternatives. Before making a decision, carefully consider the advantages and disadvantages of each alternative. Knowing the technicalities makes all the difference when it comes to reaping the benefits of gold as an investment.

To Conclude

Every investment has both advantages and disadvantages. If you don't want to own actual gold, there are other options such as ETFs, gold funds, and SGBs. Investing in gold is not a passive investment, unlike stocks and bonds that pay out regular dividends and interest. These can give good liquidity and beat inflation. The benefits of investing in gold, it appears, usually outweigh the drawbacks. In summary, investors who do not require funds shortly should consider sovereign gold bonds, while those who emphasize liquidity should consider gold ETFs and funds.

Read More: Which is a better investment? Gold Bars or Gold Jewellery?

FAQ

Is now a good time to invest in gold?

Investors believe gold to be one of the safest investments, as it quickly recovers its value during economic downturns. Its price often moves in the opposite direction of the stock market or economic fluctuations.

What is the maximum amount of gold that a person can own?

A married woman can keep up to 500 grams of gold jewellery, an unmarried woman up to 250 grams, and a male family member up to 100 grams of gold decorations and jewellery, according to the CBDT circular.

How can gold be purchased?

Gold can be purchased in a variety of ways, including coins, bars, jewellery, gold exchange-traded funds, sovereign gold bond schemes, gold funds, and so on.

What is the cheapest gold to purchase?

Gold bars and coins and gold coins are the greatest options because they come in various sizes and have a low manufacturing cost.