5 Scenarios where gold investments give fruitful returns

In India, gold is widely recognized as a safe and secure investment that stands by you in times of financial turmoil. It is the uniqueness of this precious metal as an investment avenue that makes it a must-have in your investment portfolio. This is substantiated by the fact that there have been several stages and scenarios in the economy when owning gold actually benefited the investor.

1. Gold's reaction to a fall in the stock market

   Gold has traditionally displayed a negative correlation with most other investment options. When there is a fall in the value of stocks or other financial instruments, the price of gold rallies. Therefore, people tend to invest in gold to compensate for the losses they may suffer in the stock market.

   For instance, in 2012-13, gold prices in India were on a rapid rise when the Nifty was either flat or on a downtrend.

   Related article: How gold reacts when the stock market falls

2. Gold as a hedge against inflation

   When the purchasing power of money decreases, people are drawn towards gold for relative safety. This is largely because fixed-income assets become less appealing to investors. Gold, on the other hand, redresses the impact of inflation since the appreciation in its prices is mostly higher than the rate of inflation. Therefore, people have looked to gold to secure their savings from inflation.

   Here’s a look at how the price of gold has performed in comparison with inflation:

   Related article: Why is gold considered a hedge against inflation

3. Gold as a defence against deflation

   Theoretically, deflation cannot be good for the price of gold. It is a scenario where the inflation rate dips below zero and price of commodities start to fall. However, people see gold as a ‘safe haven’ investment to tackle the uncertainties of both inflation as well as deflation.

   

4. Gold’s reaction to a weakening dollar

   As and when the value of the US dollar decreases, it becomes more expensive to import gold. This directly results in a rise in the price of gold. Also, falling of the US dollar could possibly be a result of inflation and hence it only benefits gold.

   Related article: The impact of the US dollar on gold

5. Gold in times of political uncertainty

   Due to its reputation as a safe asset, people prefer to invest in gold when political uncertainties arise. In crisis situations when trust in the government begins to waver, having gold in their portfolio provides people with a sense of security and optimism. And unlike currencies, the value of gold does not diminish during political instabilities.

   These are some of the scenarios in which gold has proved to be a beneficial investment choice for Indians. Given these historical trends, it would be a wise decision to hold a significant amount of gold in your portfolio.