In the financial markets parlance, it can be said that when the going gets tough, it is the gold that gets going. Investing in gold is an emotional decision for most Indian families. At the time of weddings and celebrations — it is customary to buy and gift jewellery.
During an engagement, gold rings are exchanged between a boy and a girl, and on the wedding day — jewels made of gold are given to the bride as her Stridhana (woman’s estate).
And these are not only emotional decisions but ingenious too. Let us understand why is investing in gold seen as a financially wise decision, particularly in the long run.
Reasons that make gold a good investment for investors in the long run:
Hedge against inflation: Gold is a safe hedge against inflation. This means when cash gradually happens to lose its value amid high inflation, it is the gold that provides a hedge to investors.
Can be converted into any currency: Gold is a currency which can be easily converted into any currency you wish to around thr world.
“Gold is universally acceptable. If you go to the US, you can convert it into US dollars, in India — you can easily convert the yellow metal into INR, so on and so forth. In a war-like situation, the aggrieved persons cannot carry their houses with them, or sometimes not even their local currency but it is the gold that is accepted as a universal currency which they carry with full confidence,” says Sridharan Sundaram, a Sebi-registered investment advisor and Founder of Wealth Ladder Direct.
Inversely proportional to equity: Gold prices are inversely proportional to equity and therefore, seen as a viable investment during market volatility. When equity prices face extreme volatility, it is the precious metal prices that usually move upward and offset the downward spiral of financial markets.
Even during market crashes, gold tends to provide a safe cushion to investors. Be it global recession of 2008-09 or Russia-Ukraine war, gold has risen despite all odds.
Rises in the long run: Regardless of market volatility or recession, gold usually moves upward in the long run. There are some estimates that suggest that gold, in the past 20 years or so, has given a CAGR (compound annual growth rate) return of around 10-12 percent, a rate that can put even some actively managed mutual funds to shame.
Small allocation is imperative: Although gold does not give reasonably good returns during market’s bull run, wealth advisors advise investors to, nevertheless, allocate a small portion i.e., 10 percent of their portfolio to gold.
And during a market crash or extreme volatility, one can raise the allocation to this safe haven marginally or considerably. Until that happens, it is recommended to keep the allocation under 10 percent, advises Mr Sreedharan.
