Sound investment decisions help individuals in meeting their long-term financial goals. Certified financial advisors and those guiding asset allocation generally advise keeping a mix of assets in the portfolio, to serve as a hedge against lossses from any one asset class. One of the best diversification tools over the past decades has been gold.
Here are five reasons why gold is popular as an investment and makes a good choice for hedging a portfolio.
Over the long term, gold manages to beat inflation, as was seen in the year 2013, when gold hit highs of Rs. 33,000 and lows of Rs. 27,000 per 10 grams. Gold prices have doubled over the last five years and quadrupled in a decade.
In a country like India, where every saving instrument may not provide returns, gold fares well when the inflation rate exceeds the interest rate. Likewise, the annualized return of gold over ten years has been way higher than that of inflation. What this means is that gold has given individuals a real rate of return.
With proper asset allocation, gold manages to offset any downside risk from bond yields or price destruction in equities. Gold shares a low negative correlation with debt and equity i.e. at different times; these three asset classes do not move in tandem. So, as an example, if equities fall, gold rallies, thus hedging your risk.
In case the local currency of an economy sees any major fall owing to macro-economic factors, gold provides investors with a cushion. When India's currency remained under acute pressure in 2013-2014, all major global currencies still managed to support gold price in rupee terms.
Many investors use gold in times of financial distress. The Indian Government itself airlifted national gold reserves to pledge to the International Monetary Fund (IMF) in the early 1990s, to cover the balance of payment debts. Households also sell or pledge the precious metal in times of financial distress. It is a refuge in times of trouble.
Gold as an investment offers dual benefits of risk-reduction and wealth creation. Even if there is no economic crisis or geopolitical tensions, the precious metal can still give decent returns in the long-term. Its past track record has already proven that. In case there is an economic or political shock, it provides the perfect investment hedge, against capital losses from equities.
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