Gold as an Investment 30 Oct 2020
Investing in gold to achieve long-term financial goals is a common practice among avid investors across the world. Gold is proven to yield high returns in the long run, often outperforming other equity-linked assets. The upswing in gold prices during the current global economic slowdown has also got a lot of people thinking short-term as they sell gold to meet their immediate financial needs.
If you are closely tracking gold’s performance to decide on your investments, understanding the factors that drive gold prices would help you anticipate the performance of gold and make the most out of your investments.
Factors that affect gold prices and investor returns in the short term
Related:How is gold price determined?
A short-term investment is relative to your own investment goals and risk tolerance. However, as a rule of the thumb, any investment made for two months or less can be considered short-term. These transactions are called contracts or trades where you can benefit from short-term price movements.
Derivatives, Futures, and Exchange Traded Funds (ETFs) are some popular avenues for short-term investment in gold. Normally, it is only experienced investors who can yield high returns from such investment avenues since they are able to predict market behaviour and invest accordingly.
Investing in a staggered fashion can provide better returns than doing so intermittently, especially if you are a novice investor.
Since July 2019, mutual funds investing in gold have provided investors returns of 43.16%, outperforming all other alternatives. Gold ETFs come with no entry or exit charges, which make them attractive avenues for small investors. Moreover, gold provides healthy liquidity, and this can be a boon during a crisis that leads to widespread layoffs and salary cuts. One reason for the liquidity of gold is that average trading volumes for gold exceed that of any other commodity.
Since gold performance closely follows inflation levels, it help’s you diversify your portfolio and safeguard your investments against market downturns. However, when choosing the right form of gold to invest in, as with all investment decisions, your own financial goals and risk-bearing potential should take priority over the desire to time the market for speculative gains.
Who is it for?
You, as an investor, might have the intent to stay invested over the long term. Gold prices typically average out over a period of 7-10 years and give higher returns as compared to other commodities. On the other hand, if you have diversified your gold investments in a mix of equities (mutual funds), stocks, and bonds (government guaranteed), you are likely to see better returns on investment. This is because gold prices are influenced by multiple short-term factors that cannot always be predicted.
Early optimism that the economy would recover faster than expected is balanced out by reports that economic growth may continue to slow down as the world continues to grapple with the COVID-19 pandemic. As an investor, the decision you must make is – in what way can the gold you hold bring you the most relief in the short term, and the most gain in the long term? If you are facing financial difficulties, you may want to sell your gold or take a gold loan, and stabilise your finances. But if you can resist liquidating your gold investments, you can benefit from the long-term gains of staying invested in gold, despite market ups and downs.
If you are looking for more guidance on this subject, here is Economist Vivek Kaul on why gold makes sense as an investment today.