Investment 22 Apr 2019
The two key pillars of any financial portfolio are investment and insurance. You need to invest your money to make it grow and also insure it to protect yourself against any economic crisis.
Now, what role does gold play in your portfolio – is it an investment vehicle or an insurance against it? Gold has something to offer your portfolio that no other asset can. It can work as an investment avenue and simultaneously as an insurance against financial crisis. Here’s how:
Insurance of any form is supposed to protect you by mitigating the damage caused by any unforeseen crisis. And for your financial portfolio, gold does exactly that. Given its low correlation with major asset classes like stocks and bonds, gold tends to perform well during an economic crisis.
Take the stock market crash of 2018, for instance.
During this time, investors found shelter in their gold investments. It compensated for their losses and provided them with liquidity.
Even during times of inflation, when prices are at their highest, gold acts as a safety net for investors. Given its limited supply and intrinsic value, the demand for gold never goes down, and neither does its price.
Not just that; investors also use gold as a hedge against currency depreciation. When the dollar gets weak, gold tends to get more expensive. Hence, people turn to gold as a haven when paper currency seems to be under threat.
Historically speaking, when currencies are demonetised, or their purchasing power falls sharply, or when the share market comes crashing down, gold in investors’ portfolio comes to the rescue. Hence, gold makes for a sensible addition to your portfolio as it acts as a fruitful diversifier.
While the reputation of gold as insurance is well established, gold has also proved itself as a lucrative investment asset that yields returns even in strong economic times.
We can see that gold has outperformed some of the most fruitful investment assets in the past.
Gold’s value in the long term is supported by economic growth. Not only does it act as a hedge against inflation, it also provides unbeatable returns over the long term. Unlike other asset classes, the value of gold transcends geographical boundaries and sovereign currencies. It is easily available and transparent, and yet provides better liquidity than any other asset.
Buying and selling of gold has taken various forms these days. Apart from physical gold, gold Exchange Traded Funds (ETFs) and digital gold are providing the modern-day Indian with newer ways to invest. Unlike jewellery and coins, these do not have any making charges and the hassle of storage and they are also easily available in smaller denominations for those who are just starting out with gold investment.
Whether people buy gold conventionally or use one of the newer avenues, it will continue to be a unique and much-favoured investment option for Indians. So, whether you categorise gold as insurance for your investment portfolio or an investment in itself, gold is undoubtedly a worthy addition to it.
Related article: Why is gold seen as insurance?
Gold futures are instruments that are traded on the MCX. One can buy into these gold futures in order to invest in gold. These futures contracts tend to track gold prices. Moreover, the investors have to ensure that they settle these futures contracts by pre-determining a closing date.
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