The 2020 magical rally for gold suddenly has caught the eye of thousands of retail investors everywhere. Given how volatile other investments have been this year, this has excited some investors. However, this can be a periodic phenomenon in what has otherwise been a dull investment. In any case, the purpose of investing or not investing in gold isn't nearly the returns, but also about the source of these returns.
Indian savers are still hostage to the standard view of physical gold, which is that it's an easy and useful investment, a protection against bad times and every one household should invest in it. The more modern market-oriented view is that gold could be a commodity to be traded rather like other commodities.
However, our belief is that the right view is something else entirely. Savers can legitimately treat gold as an investment, and it has some unique features. However, it’s may not be a good investment and there are always better things to try and do together with your savings. As an investment, like every other, it must be judged in step with returns, with liquidity, stability, and other such factors being additional parameters.
The returns tend to be worse than other investments of comparable risk and volatility, and this may always be the case. The explanation is that gold doesn't actually produce anything or create any value. Any rise in its worth relies on the idea that when the time involves selling, somebody else pays more for it. Unlike equity or bonds or bank deposits, the cash that you just invest in gold doesn't contribute to the economic process. the identical amount of cash put into a decent business or the other productive economic activity will create wealth. However, a given quantity of gold will remain the identical forever.
Warren Buffett has long held that investing in gold is 'stupid'. Back in 2009, the Oracle from Omaha had this to mention investing in gold: "The one thing I can tell you is it won't do anything between now and then except take a look at you. Whereas, you know, Coca-Cola is making money, and that I think Wells Fargo is making lots of cash, and there'll be lots - and it is a lot - it is a lot better to possess a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and some things like that."
Investing in physical gold like bars, jewelry, and coins, comes with issues like storage, security, and even liquidity. Further, what you earn solely depends on the worth of gold rising or falling. Now Gold (not physical good) may be a good idea if you are looking to diversify your portfolio. Investments in gold can be used as a means to reduce risk and exposure to equity. It can protect you in times where the markets take a hit but its just that. Most times gold is just like any other commodity, heavily reliant simply on demand and supply and nothing else.
A lot of individuals find it difficult to just accept that gold isn't a decent investment because we instinctively think about gold as permanent wealth, a currency that has survived all types of historical troubles. this can be unarguably true. Is that enough for gold to be considered an investment by savers in an exceedingly modern financial system where we have FDs, RDs, and Bonds? That is for you to decide.
Gold Returns v/s Equity:
Gold prices are negatively proportional to equity. However, if you study returns over the long term, equity has done better compared with gold. But with equity being volatile in recent times, shouldn't gold be used as a hedge? What if there's a repeat of what happened in 2008-09. In those cases, people may shift their eyes towards gold and drive up prices. If you allow your portfolio to prepare for such situations, then a smallholding in Gold may be good.
How much should one invest?
If you continue to want to speculate in gold it should only form a little a part of your portfolio, say financial advisers. Vikas Gupta CEO & Chief Investment Strategist OmniScience Capital, an investment management firm, says that somebody with stable and regular income mustn't put quite 2-5 percent of their portfolios within the value. And for people who don't have a regular income, he suggests that they put in no more than 10 percent.
Financial planners also suggest for investments, you ought to consider special drawing rights - gold exchange-traded funds, fund-of-funds, and sovereign bonds - rather than physical gold. These are more cost-effective and more liquid.