Should you Invest in Gold now?

Recently, when Tusharika’s grandmother was going through her collection of gold ornaments, the two had an interesting conversation. “Look at this bangle. Your father gifted it to me when you turned 10. 20 years ago, this bangle only cost around Rs. 9000, but today, it would be worth over Rs. 1 lakh!” her grandmother said. Tusharika was shocked. She had read reports on how the precious metal was witnessing robust growth in its value but such an exponential rise was beyond her wildest imagination. The conversation sparked her interest in gold investment and she began to wonder whether she should invest in gold at present. If you are wondering the same, let us take a look at the important aspects to keep in mind.

Factors impacting gold prices

As with every commodity under the sun, gold also derives its glitter from the underlying demand. So, what has triggered demand so sharply as to lead to such a surge in prices over the last two decades? One of the biggest factors leading to price spikes is economic uncertainty. Over the years, the global and Indian economies have witnessed several lows and, when the market becomes volatile, you would inevitably turn towards the safety offered by the yellow metal. Another major reason behind this heightened surge revolves around the rise in inflation. Over the years, inflation has risen sharply and sustainably, pushing up the prices on all commodities, including gold.

Recent correction in price

If you have been keeping an eye on the recent movements in gold, you would have noticed a correction taking place. No, that is not because of slowing inflation – rather, the price of gold has corrected on the back of positive sentiment. With post-Covid economic activities resuming and gathering strength, investors are returning to the stock and debt market in droves, thereby diminishing their holdings in the precious metal. This has led to a drop in prices, making it an opportune time for you, and Tusharika, to consider investing in gold.    

Why should you buy gold?

As you have seen from the conversation earlier, historically, the price of gold tends to witness sharp surges, meaning that any opportunity to buy gold at a cheaper rate is a good one. Further, a gold investment at present can help you hedge against inflation because the value of your investment will rise in tandem with inflation. In fact, over time, the price of gold has risen faster than inflation, meaning that your investment can potentially yield rich dividends in the future. Another great reason to invest in gold is portfolio diversification. Gold is one of the asset categories delineated under optimal diversification and, given that prices are currently trending lower, there is no time like the present.

How much should you buy?

This is a difficult question to answer because your asset allocation depends on various factors such as your risk tolerance, return requirements, and investment objectives. If you have a high appetite for risk and require high returns, it is best to keep your gold investment ratio below that of equities. However, if you have a long-term horizon and a low appetite for risk, then you can allocate a greater portion of your portfolio to the glittering metal.  

Ways to invest

So, should Tusharika go and buy herself gold jewellery if she wishes to build her position in gold? Not necessarily. Lets see why investing in physical gold is not the best idea:

• Unless you wish to utilise the jewellery on a regular basis, investing in gold, in the form of jewellery, is inadvisable owing to the high making charges and the loss of value over time.
• Further, storing gold in physical form is both a security risk as well as an unnecessary expenditure of space.

Instead, you can invest in gold via gold exchange traded funds, sovereign gold bonds, gold funds, and digital gold. These options enable you to benefit from the advantages of investing in gold, without undertaking any adjacent hassles.

While Tusharika has decided to purchase units in a gold ETF, her granny is looking forward to her next bangle. How do you plan to capitalise on this golden opportunity?

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