Why is gold seen as insurance?
In India, this is especially true as many Indians keep on investing in gold, part of it is tradition, and the other is seen as a sound financial instrument. In fact, roughly 700 tonnes or about 33% of the total gold mined in the world is consumed in India, making it the largest importer of the commodity.
So, why do Indians see it as a form of insurance? Because it is.
Insurance, like any – life, health, auto, etc. – is bought on the primary belief of mitigating risk in case things go on a downward spiral like an accident, illness, unexpected death, etc. Similarly, gold is seen in the same way – mitigating the risk.
On a complete financial planning point of view, gold makes sense to be part of the portfolio. After all, it is always a safe bet to diversify your investment portfolio. Precious metals like gold can complement a portfolio of stocks, bonds and various other investments. If one of your investments drops, another may go up and protect you from suffering a major decline in your holdings.
Gold also protects investments during a time of market volatility and fluctuations. Historically, gold holds its value well in rough economic times. With the cyclical nature of equities, expect markets to crash and owning physical gold will be well-rewarded.
The actions of the Reserve Bank of India (RBI) have kept inflation in check, but gold (even then) retained its true value, unlike true necessities like food, where prices kept on creeping higher. In times of inflation, the dollars in your savings account buy fewer goods and services, but gold maintain their value.
Gold is traded in US Dollars. When the dollar weakens, it helps push-up the price of gold. No matter where you are in the world, gold can be converted into local currency based on its value in US Dollars. Not bad wouldn’t you say.