For ages, gold is known to be the safest investment option. It is known as a store of value and this yellow metal is amongst the favorites of investors. Gold is known for its value and rich history across the globe and is a part of the diversified investment portfolio of most investors. The investment has evolved over time from physical to virtual/digital/ Gold trading. Though all forms of gold investment are equally popular. This asset is highly liquid and doesn’t carry any counterparty risk. People often choose gold as an investment option to fulfill their financial goals. It acts as a vehicle to reduce losses in times of economical and political unrest as well as a hedge against inflation and currency risk.
Before starting to invest in gold, you must know these key facts:
- It is a conventional asset driven by various factors
- It acts as a diversifier
- It offers competitive returns as compared to most financial assets
- It offers positive performance and protection during a crisis
Below are listed some reasons why gold should form part of an investor’s portfolio:
1. Portfolio Diversification
Economists believe that gold is an effective portfolio diversifier because of its low to negative correlation with other asset classes. However, there are shreds of evidence that when there is a rapid fall in the value of equities, there are chances that an inverse correlation can develop between equities and gold. Gold is known to protect an investment portfolio from volatility as the macro-economic and the micro-economic factors which significantly affect the return of major asset classes have nearly lesser or no impact on prices.
2. Inflation hedge
Gold acts as an excellent hedge against inflation as its price rises when there is an increase in the cost of living. Over the past few decades, investors have observed that during high inflation years the prices of gold rise and the stock market declines. This is because the purchasing power of a flat currency is reduced due to inflation, it tends to be priced in those currency units and rise along with everything else. If we consider the returns on gold over the past ten decades we will identify that the returns were way higher than the inflation.
3. Can’t get Bankrupt
The value of gold can never hit zero, it is never seen in its history of 3000+ years. Gold is the safest investment one can ever think of. When a crisis breaks out, it will be the last man standing out. This is because it is the only financial asset that isn’t a liability of some other entity. It is a powerful asset you must have in your portfolio at times of economic uncertainty.
4. Deflation Protection
At times of deflation, the economy gets burdened with excessive debt, a decrease in prices and a slow down of business activities. In this situation also, the purchasing power of gold escalates, irrespective of the downfall in other prices. This is because during deflation people choose to hoard cash and it is the safest way to hold cash.
5. Geopolitical Uncertainty
Gold is known as a crisis commodity because it not only retains its value during the financial crisis but also during political uncertainty. It is the safest commodity to invest in and it outperforms when tension rises in the world and confidence in the government are low. For instance: the prices experienced a significant price movement during the European Crisis.
Concluding Words
Gold is the most important part of any investor’s portfolio. Studies have proved that it is profitable to hold 2-10% of your portfolio, it will lead to positive results. The decline in paper investment results in a rise in the prices increases which makes an ideal investment. Though the prices may be volatile in the short-term, gold maintains its value over the long-term. For ages, it has been known to be a hedge against inflation and is worth investing in. If you are planning to invest, make sure it is for long-term.
