India’s fascination for this precious metal only seems to be growing. Jewellery? Sure! Investment option? Not so sure, right? Here’s all you need to know.
Not too long ago, gold was used as the primary currency in many places around the world. Times have changed and that is no longer true. However, gold is still a solid, long-term investment and might just be a valuable addition to your portfolio.
If you’ve been meaning to invest in gold and wondering if it is a good option, this article will help you. Investment in any form is devoid of surety, but one can always take a well-informed decision. We’ll give you the facts, you make the decision. How about that?
Additional reading: All You Need To Know Before Investing In Gold ETFs
To begin with, let’s answer a common question.
When should I invest in gold?
- Stock market declines and political turbulence may indicate a future devaluation of the local currency.
- Reserve Bank announcements to print out more currency may also indicate a good time to invest in gold.
- The best time to invest in gold is when inflation is expected to take hold and force down the value of the local currency. If you can detect a potential drop, you might just make a solid profit. When the local currency is strong, and inflation is not expected, there is not much room for the price of gold to rise.
For a practical investor, it just might make sense to adopt the ‘buy, hold and wait’ strategy. Buy when the price of gold is down, whether or not the economy is going through turmoil or you think it’s headed for some turbulence. In this way, you don’t have to worry about buying when everyone else is buying and driving the price up.
Let’s list out the pros and cons. Pros first.
Pros Of Gold As An Investment
Gold is a popular investment option for a number of reasons. We’re listing out the most common ones for you:
- Retains Value. Even if the price of gold decreases, the underlying value of gold does not change much. Why is that? Because there is a finite quantity of gold due to the fact that it is a commodity.
- Use Of Gold For Other Products. Gold is used in the production of various products like jewelry and electronic items. This ensures that there is a constant demand that further stabilises the price of gold. In fact, when the demand for these products increases, the price of gold becomes higher.
- Diversification. Adding different securities to your portfolio is a great way to diversify and lower the overall risk of your investments.
- Easy Conversion. Gold can be easily converted into cash anywhere in the world. It’s almost synonymous to cash and is easily recognised for its value universally.
Cons Of Gold As An Investment
As listed above, gold can be a great investment option. However, it’s best to factor in the following points as well:
- Physical Storage. If you choose to buy physical gold, you will need to store it and insure it. Otherwise, you won’t be able to replace it if it is damaged or stolen.
- No Passive Income. Other investments such as stocks and bonds may derive a portion of their value from passive income in the form of interest and dividends. However, the only return you can make on gold is when the value increases and you decide to sell.
- The Gold Bubble. During economic turmoil, many people start investing in gold, but when investors start to panic, gold can become overpriced. When price correction takes place, you could lose money.
- Impact Of Local Currency Devaluation. Many economists argue that gold only increases in value when the local currency is devalued or inflation is strong. As a result, critics feel that gold doesn’t offer adequate returns in other markets.
Additional Reading: Things To Keep In Mind When Buying Gold From A Jeweller
What percentage of my portfolio should gold make up?
This really depends on your risk appetite. There isn’t a hard and fast rule that you can follow. You should employ the same portfolio-management strategies for allocating gold as for purchasing other investments.
Additional Reading: All You Need To Know Before Investing In Gold ETFs
Gold can be a profitable investment when others don’t quite work for you. If you are concerned about inflation or the devaluation of the rupee, you may want to add gold to your portfolio. That said, it is very important to understand the specific gold investment you’re considering thoroughly before you actually invest.
Additional Reading: Should You Invest In Physical Gold, Gold ETFs or Sovereign Gold Bond (SGB) this Dhanteras?
As tempting as it may be to buy a lot of gold in a struggling economy, try not to get carried away.
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