How should retail investors look at gold?

Investment 22 Apr 2019

Gold investment portfolio

Gold has always had an irreplaceable place in Indian hearts and households. However, if you are confused about the role it can play in your investment portfolio, read on to find out why investment guru - Hansi Mehrotra believes gold is an ideal fit in a modern-day retail investor’s portfolio:

Diversification

– Gold is a very handy option if you are looking to diversify your investment portfolio. Gold has very low correlation with most financial assets like equities and bonds. As a result, it makes for an excellent diversifier and ensures that the profitability of your investment remains intact even in a falling stock market. If you are looking at diversifying your portfolio, you can invest in gold in various forms including exchange-traded funds (ETFs), gold funds, or physical gold.

Portfolio insurance

– Just as you buy insurance to protect your life, health, or car against any unforeseen contingency, it is essential to insure your portfolio as well. Gold can act as insurance for your investment. Traditionally, gold has had an inverse relationship with most other market-driven investment options. So, when the value of most of your financial assets falls, the value of gold is likely to go up.

So, if you had invested in shares as well as gold in the pre-recession era, chances are your gold stock would have amply covered the loss you would have suffered in your equity portfolio due to the recession.

Related article: How gold reacts when the stock market falls

Liquidity

– As an investment asset, gold is easily available, liquid, publicly offered and transparent. All this makes it a very reliable tool for wealth retention. Gold retains its value in the long term, and unlike shares of a blue-chip company, it is not dependent on the economy or the company’s performance. Gold has physical longevity and can act as an essential part of a long-term investment strategy. In spite of this characteristic, gold is highly liquid – you can pawn it or get a mortgage loan against it quite easily.

Tangibility

– Gold is a preferred form of investment because it is also a tangible asset. Physical gold is known to offer people a sense of safety and security. And unlike other tangible assets such as land and house property, buying gold is very easy and convenient.

This is where the wealth retention property of gold comes into play. As the purchasing power of the local currency falls, the value of gold generally goes up. Consequently, people prefer to hold their wealth in the form of gold. When there is a spike in inflation, particularly when it touches double digits, gold acts as a long-term hedge against inflation.

Related article: Why is gold considered a hedge against inflation?

Geopolitical factors

– Gold is known to react positively during global geopolitical disorders. Recently, the political tension over Korea’s nuclear arms sent shockwaves in the equity market but gold price actually improved. The reason for this pattern is that in such uncertain situations, people fear that a financial crisis will return and their wealth will shrink. So they start to invest heavily in gold because they know it is an effective wealth retention vehicle.

Conventionally, buying gold in India was all about culture and tradition, but its purchase is also backed by valid reasons like those given above, which makes a lot of academic sense. So, if you haven’t done so already, this might be the right time to invest in gold.

Gold Glossary

Allocated gold

Refers to physical bullion that is stored in a professional vault for safekeeping whose outright ownership belongs to the investor of the stored gold.

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