scorecardresearchIs this the right time to invest in gold?

Is this the right time to invest in gold?

Updated: 29 Jun 2022, 12:43 PM IST

Stock markets and gold prices have the opposite relationship. The demand for gold rises when the stock markets fall because more and more investors start looking for safer investments.

Stock markets and gold prices have the opposite relationship.

Stock markets and gold prices have the opposite relationship.

Investors are always looking for the next big thing to invest in. And while there are many options available in the market, gold and Nifty are two of the most discussed topics among the investor community.

Gold or Nifty: Which of the two offers a better investment opportunity?

Should you go heavy on stocks due to the market crash as interest rates are rising in the market?

Or should you move some of your investments to Gold?

Hold on! Before taking any step, let’s understand the relationship between gold and equity.

Given the remote possibility of gold losing all of its worth, gold is regarded as one of the safest investment options. Although gold prices may change, they will never reach $0.

In times of unpredictability or economic crisis, the price of the yellow metal spikes precisely for this reason. This is extremely clear since investors would choose safer options over those that are more subject to changing economic and geopolitical conditions.

Stock markets and gold prices have the opposite relationship. The demand for gold rises when the stock markets fall because more and more investors start looking for safer investments. This inherently skews the price of gold, as demonstrated by the fact that gold prices have in the past risen during periods of economic crisis or recession.

READ MORE: How are gold prices decided in India?

Early in the 2000s, the developed countries' recession drove up gold prices. The American markets became volatile as a result of several events. A downturn in the stock markets of the developed countries was brought on by a number of events, including an aerial attack on the World Trade Centre in New York City, US military operations in the Middle East, and the moving of manufacturing operations outside of the US. The price of gold rose dramatically as a result, in a cascading fashion.

The typical gold price per troy ounce in 2001 was $271.04. By 2002 and 2003, it had reached $309.73 and $363.38, respectively. Additionally, it increased significantly to surpass the $600 mark in 2006. Such was gold's significance in the early 2000s, when the world was experiencing numerous financial difficulties.

The price of gold considerably increased during the 2008 recession. The subprime mortgage crisis has severely hurt many important indices all around the world. The Indian benchmark indices experienced record-breaking declines during the 2008 fiscal crisis. In fact, between January 2008 and February 2009, the S&P BSE Sensex dropped more than 50%. The price of gold skyrocketed as a result. As a result of the subsequent market volatility on a global scale, gold prices rose from $700 per ounce in 2008 to $1,900 per ounce in 2011.

The start of the Sino-American trade war in early 2018 brought the financial ghosts back after a brief period of market stability. China and the United States are the two largest economies, and the performance of these two nations' trade relations will have an impact on a number of developing economies throughout the world.

READ MORE: Want to invest in Gold? Here are 4 best ways

Multiple negotiations to ease the rising trade tensions between the two countries ended in failure. This led to an increase in gold prices between 2018 and 2020. The average price of gold was $1257.12 in 2017, and it skyrocketed to $1392.6 in 2019.

Despite the availability of a number of other assets, investors favour gold during recessions as it offers the flexibility and liquidity that are most needed.

But this time, something seems different. There has been a recent decline in the price of gold. From Rs. 53,890 on March 8, 2022, to Rs. 50,619 on June 23, 2022, it has decreased by as much as 6.06 percent.

But what might be the potential cause of the same.

Since the Fed is raising rates gradually rather than abruptly, gold prices are currently suffering. Aggressive tightening (of interest rates) could cause a recession and drive investors to gold to offset a decline in riskier asset classes like equities,

Due to the demand-driven nature of gold prices, most people are favouring other assets that might yield higher returns. Additionally, the price of gold has been under pressure due to a strong dollar and higher bond yields. Investors now find the dollar appealing.

So, should you invest in gold?

Buy gold for the purpose of diversification. If the recession continues, then there could be a high chance of gold prices going up in the future. So it’s better to take an exposure for the same. You will always have a resource to fall back on if something unexpected happens. Due to its high liquidity, gold enables you to quickly meet your financial needs. It is recommended to put between 10 and 15 percent of your portfolio towards gold.

Aditi Khandelwal is a Certified Financial Planner and a Content Creator who loves to simplify Finance. She can be reached on Instagram aditi.khandelwall_ and Twitter @aditik_29

Sovereign Gold Bonds (SGBs) are government securities denominated in gold with one gram as a basic unit.
First Published: 29 Jun 2022, 12:43 PM IST