Why Invest in gold?

Investors have been lured by the shine of gold for hundreds of years. What makes gold such a sought-after investment?

At the height of the pandemic, when most asset classes floundered, gold glittered, and even crossed the 56.5k mark at its peak.

Gold’s ability to shine in a crisis is one of the factors that investors love about the yellow metal. Be it a war or financial crises, a pandemic or a natural calamity, people turn to gold in times of uncertainty. That’s why gold is called a safe haven. Let’s look a little more closely at the benefits of investing in gold.

Benefits of Investing in Gold

There are several factors which makes gold a great asset class to invest in:

Safe haven :

Unlike fiat currencies, gold has intrinsic value, and it has maintained its position as a store of value for thousands of years. In times of crises, investors tend to move to gold as financial assets turn volatile.

Steady returns :

While historically, financial assets like equity may have performed better than gold in terms of returns, the yellow metal still offers decent returns. In the last five years, gold has returned on average 10-15% pa, a much better return than fixed income assets. 

Portfolio diversifier :

Gold is a great diversification tool because it is usually negatively correlated with financial assets. During crises, when financial assets face a meltdown, gold prices rise. That’s why many experts recommend investing 5-10% of your portfolio in gold. Portfolio diversification reduces risk and ensures you can tide over volatility better

Hedge against inflation :

Inflation eats into your money. If you keep your money idle, it’s purchasing power will decline over time as prices rise. Over long periods of time, gold has been able to deliver returns that are greater than the rate of inflation. In the last 10 years, gold has delivered an annual return of 11% pa, while inflation, based on the consumer price index, has grown at 6.3%. Gold can be volatile in the short-term but beats inflation over long periods of time. 

Gold supply :

The supply of gold in the world is limited. Most of the gold is held by central banks, and they continue to buy and hoard gold. Mining for new gold is capital intensive and resource heavy and there’s been a gradual slowdown in new supply. Supply constraints work in the metal’s favour. Fiat currencies can be printed at will by central banks, but since gold supply is limited, it will continue to hold value.

Store of value :

Gold is a natural store of value. Fiat currencies can lose (and in the past have lost) all their value. But gold will always be tradeable. It’s value is unlikely to ever fall to zero. Another benefit of gold having intrinsic value is that it does not carry any counterparty risk.

High liquidity :

Despite being a physical commodity, gold is highly liquid. You can easily exchange it for money anywhere in the world. Most digital gold products are also highly liquid, and tradeable on exchanges.

How to invest in gold

As you have seen, investing in gold has many benefits. ICICIdirect research recommends 5-15% allocation to Gold in your investment portfolio to diversify risk. But how should you invest in gold?

One of the best ways to invest in gold is through Sovereign Gold Bonds. SGBs are sovereign-backed since they are issued by the government of India. In addition, the bonds carry a 2.5% interest p.a. and attract 0% tax on capital gains if held to maturity. Moreover, SGBs are tradeable on the stock exchanges.