Investing In Gold

Now let us come to a very pertinent question –What’s in it for you? As with the demand for gold, the reasons why people invest in gold is also varied.

Here are the most common 5 reasons why people invest in gold.

1. Gold is secure

The value of gold doesn’t decline in the long run. Yes, it does go down in the short run, but, in the long run, it has gone up, up and up. For example, in September 2012, gold prices ₹30182.90 per 10 grams, after which it started falling. It reached a price of ₹ 22596.60 per 10 grams in December 2015. For someone keeping a short-term view, this will look like a 25% fall. But keeping a long run perspective, it is important to remember that after December 2015, gold prices started moving upwards and reached ₹49191.10 per 10 grams in August 2020. 

You can find more about historic gold price movements in the Gold Prices section of this module. 

2. Gold brings stability

The prices of gold are not easily affected by political and economic uncertainties. Hence, it is perceived as a safe investment by millions around the world. The prices of gold are not easily affected by political and economic uncertainties. Hence, it is perceived as a safe investment by millions around the world. For example, the Eurozone crisis which started in 2009 adversely affected the economies of all European countries. The value of the Euro dropped drastically which led to many European countries plummeting into heavy debt. However, gold prices kept increasing steadily during this time and reached a record level of Euro 1332.30 per troy ounce in 2011.

This weak correlation of gold with political and economic turmoil is one of the main reasons why gold is a preferred form of investment in African and Middle Eastern countries.

3. Gold adds diversity to a portfolio

Any portfolio needs to be diversified to perform well in the long run. Gold is an ideal choice for bringing in diversity to the portfolio. The prices of gold are not linked to the stock market, bond market or real estate and hence are unaffected by their volatility.

Take the year 2020 as an example. The Coronavirus pandemic affected all economies of the world adversely. Most economies went into a recession. However, gold has seen a steady increase in price since the beginning of 2020. 

NYSE Composite Day Close

Gold Prices (USD per troy ounce)

In the graphs given above, you can see that the New York Stock Exchange (NYSE) Composite Index experienced a sharp fall in March 2020 when the Covid-19 pandemic started affecting the US economy. Since then, NYSE Composite has been struggling to go up. However, gold prices have experienced a steady upward movement during this time, quite unaffected by global economic conditions. The situation has been similar in almost all economies around the world. 

Hence, investors started trading in gold, rather than participating in the uncertainties of the stock markets. 

4. Investment in gold can earn dividend income

Well, traditionally when we talk about gold, the only thing we think about is buying physical gold. However, there are various ways in which one can invest in gold such as purchasing physical gold, gold exchange traded funds, derivative products in gold such as gold futures and gold options, gold mutual funds and much more!

One such mode is investing in the shares of the companies which mine gold or investing in gold ETFs or gold mutual funds. Both gold mining companies and gold ETFs have historic records of paying dividends to investors. 

Here’s a list of some prominent global gold mining public companies and ETFs and their dividend yields as on Jun 22:

5. Gold is a hedge against the dollar

For those who are concerned with the international economic scenario in some way, gold is a great investment since it provides a hedge against US Dollar rates. In October 2018, the USD to INR rate was 74.21, which means 1 USD was worth ₹74.21. This started going down (which means INR started to strengthen). In July 2019, this rate went down to 68.69. 

Now, what can this mean for an NRI who lives in the USA and sends $10,000 every month to India to build up a savings portfolio?

In October 2018, his $10,000 was worth ₹7,42,100. However, by July 2019, he could get only ₹6,86,900 for his $10,000, which would have made a significant gap in his portfolio planning. However, the price of gold in October 2018 was USD 1,215.0 per troy ounce and by July 2019, it went up to USD 1,427.6. 

So, instead of sending the 10,000 USD back to India in October 2018, he had bought gold, his wealth wouldn’t have eroded by July 2019. On the other hand, it would have gone up.