In this article we will be discussing why gold should not be missed as an investment. In next article we will be discussing about ways of investing in gold and particularly ETF's (Exchange Traded Funds)
Gold has a low or negative correlation with most other asset classes, which means that its price changes are independent of price changes in other asset classes like equities or debt. Gold's low correlation with other assets is a function of the unique drivers of demand and supply. Adding gold to the portfolio in small percentages can help reduce overall portfolio volatility.
Gold is renowned as a hedge against inflation - as inflation goes up, price of gold also tends to go up along with it. Gold preserves the purchasing power and even increases it gradually. Inflation adjusted gold prices have generated a positive rate of return in the last 7 years.
Why Gold should be integral part of your Portfolio
- Gold acts as a hedge against market volatility, it has been relatively stable as compared to other asset classes like equity, commodities
- Gold has historically been a hedge against inflation.
- Gold has been a hedge against depreciating dollar.
- Gold “a safe haven” in uncertain financial and geo-political stress.
- Gold can act as a hedge against dollar currency exposure.
- Gold has been a consistent good protection against exchange rate fluctuation.
- Gold can be used as an instrument of trade in a barter economy and could be your only way to purchase critical necessities in a financial crisis or in the event of financial disaster.
- The Central Banks across the world store their wealth in gold for the reasons already stated; they have little faith in the currencies.
- Paper currencies have come and gone, empires and world powers have disappeared. The world has changed in many ways and yet gold can still be used as money anywhere in the world.
Gold as an asset class has protected investor's wealth in times of downturn, when it is needed the most. Historically, gold has been relied upon for its safe haven characteristics in times of financial or economic crisis. Adding gold to a portfolio may help improve risk adjusted returns or reduce volatility for the expected return. Hence in our view long term investors should keep increasing their exposure in gold.
Gold-Protector of wealth against inflation
The value of gold, in terms of real goods and services that it can buy has remained remarkably stable. In comparison the purchasing power of many currencies has generally declined.
Over the long term, through both inflationary and deflationary periods, gold has consistently maintained its purchasing power.
Outlook of Gold
Weakening dollar outlook:
- China, United Nation among others have expressed concern over US dollar as the world reserve currency.
- Gold tends to benefit from weakening dollar.
Higher inflation expectation:
- Unprecedented monetary and fiscal policy stimulus is likely to lead to higher inflation.
- G-20 countries intend to maintain loose money policies until economies recover clearly.
- Gold is seen as a good hedge against inflation.
Investment demand and Portfolio diversification:
- Robust Investment demand in Bars, Coins and ETFs driving prices higher.
- Lack of significant correlation with other asset classes drive up gold demand.
Jewellary demand:
- Jewellery has been low due to high prices as investors have been waiting for a major price correction and correction didn’t take place.
- This uncatered jewellery demand should cap the downside as investor will rush to buy jewellery if prices correct.
Central Banks likely to diversifying their foreign exchange reserves into gold:
- China has increased its gold reserves by 75% since 2003 and now holds around 1054 tonnes of gold reserves.
Third Central Banks Gold Agreement:
- Reduced gold sales to 400 tones per year from 500 tones per year
Geo-Political uncertainties should also benefit gold
Indian Scenario
There is no doubt about the popularity & demand of gold in a country which buys it for jewellery, contingencies, gifting, wedding, mortgage requirement Gold has ritual, religious sentimental values attached to it, so it can’t be substituted and demand is more or less indispensable. Inspite of subdued gold demand over a period, we expect the gold prices in India to stay firm on strong global investment demand of gold coins, gold bars and gold exchange traded funds. There is a need for an instrument which is available in small denomination, convenient for long term holding, cost effective and offers easy liquidity
How we can invest in Gold
- Physical Gold/Jewelry
- Commodity Exchange
- ETFs(Exchange Traded Fund)
We will Discuss about various as well as most appropriate way to invest in Gold in next article.
