“The desire of gold is not for gold. It is for the means of freedom and benefit”
– Ralph Waldo Emerson
We are in Sept, 2021 and the gold price is around Rs. 47000 per 10 gm. 10 years ago it was around Rs. 25000. See the chart showing the price of gold over the years. Some people have been wise enough to buy gold regularly while others think that it is just a fad which will pass. Let’s not forget that gold is admired throughout the world. It has a rich history which is thousands of years old. Gold is the only asset which can hold on to its value at a time when inflation is running high or the stock markets go down. In India, we have a tradition of buying gold on festivals and marriage. It’s time we take a serious look at gold as an investment avenue.
Since ancient times, gold has been a symbol of wealth and power, a store of value and a legal tender in most of the regions. It has a strong imprint on human psychology. It gives peace of mind during the times of social unrest and war. If you tell your parents that you are buying gold, they'll never say no.
These are the main reasons for investing in gold for our times:
1. Store of Value – Rupee or dollar can lose their value over time due to inflation or other reasons, but gold has maintained its value throughout the centuries as it is easy to preserve. In medieval times, the coins were minted in gold. Even now some people see gold as a way to pass on their wealth to the next generation.
2. Durability – Gold is one of the most durable metals on the planet. It doesn’t rust or stain. It can only be corroded under specific circumstances. You can bury gold deep into the earth and come back in 50 years (or 500 years) and it would be the same.
3. Inflation – Gold shines when inflation fears are rising in a weak economy. Historically gold has been a very good hedge against inflation, as its price also tends to rise when the cost-of-living increases. Oil prices are rising once again. Commodity prices are also on their upward journey. The food and fuel prices in India are contributing the most to the rising inflation. As inflation begins to take its hold, stocks and bonds may stagnate, while gold can appreciate in value. The gold should be a part of the portfolio before inflation starts inching up so that you are able to benefit from the rising gold prices.
4. Weakness of the U.S. Dollar – The U.S. dollar is one of the world's most important reserve currencies, but the price of gold and the value of dollar historically have an inverse relationship. If the value of the dollar drops, more dollars would be required to buy the same amount of gold. This negative correlation may not be evident on a day-to-day basis, but can be clearly seen over longer periods. Due to the excess liquidity in the market since the financial crisis of 2008, the correlation has changed somewhat, but we cannot forget the long term trend of gold vs. USD.
5. Increasing Demand – India and China are the largest gold consuming nations in the world. Increasing wealth in the emerging markets has boosted the demand for gold in these two countries. The Indian wedding season late in the year usually sees the highest global demand for gold. In China, the gold bars are a traditional form of savings for most of the people. Demand for gold is also growing among investors, as they see it as a safe investment alternative.
6. Supply Constraints – The supply of gold has been stagnating in the last few years as the demand keeps rising. There is not enough gold-mining to satisfy the demand. The rising prices have acted as a catalyst for some reserve banks to start selling their gold reserves.
7. Rising Interest Rates – History has shown us many times that rising interest rates often means rising gold prices. RBI has kept the interest rates benign but it may not be able to hold the rates for a long time due to continued inflation. Rising inflation in India does not provide any other option to the central bank and borrowing money may become more costly. This may create a situation in which stocks and bonds may find it difficult to rise further.
8. Portfolio Diversification – The main reason to diversify your portfolio is to find investments that are not closely correlated to one another. An investor should buy gold along with stocks and bonds in a portfolio to reduce the overall risk. Historically, gold had a negative correlation to stocks, which means that gold prices and stocks don't go up at the same time. As the stock markets are growing rapidly, it’s not wise to put all your money in stocks only. This makes gold an ideal investment for any portfolio.
As the US trade deficits continue to increase, the dollar may start its decline when the global economy stabilizes from the coronavirus crisis. Investors all over the world are looking for safe investment options and gold has always been valued by generations of people. The price of the yellow metal can be volatile in the short term, but it has always maintained its value over a long period of time. An investor may choose to buy gold coins, gold funds or gold ETFs, but it should be a part of any portfolio.