When it comes to investing in gold, the financial experts are divided into two camps. While one camp outrightly dismisses it as an investment option, the other camp holds the view that although gold no longer backs the major world currencies, it does possess some intrinsic qualities which makes it a good option for diversifying your portfolio.
Gold still plays a very important role in the economy, which is evident from the fact that Central Banks all over the world and international financial organizations like IMF hold nearly one-fifth of the total supply of above-ground gold. So, gold investment can play a very important role in diversifying your portfolio. Here are the top 6 reasons why you should consider to include gold in your portfolio.
1. Gold Has Maintained its Value Over Centuries
Gold has been able to maintain its value throughout the years and thus, has been able to perform one of the most crucial functions of money – the store of value function. Unlike any other type of fiat currency, Gold can perform this function for a very long time and this is the reason why it is being used by many to preserve and pass on wealth from one generation to another.
The price of gold rises when the value of reserve currency or US dollar falls. While the value of other assets goes down during an economic downturn, gold maintains its high value. This makes it all the more attractive during an economic downturn and also when the value of reserve currency exhibits a downward movement.
2. Hedge against Inflation
Inflation is a period characterized by the increase in prices of goods and a reduction in purchasing power or value of money. In fact, the value of all major currencies of the world has depreciated over the long term in comparison to gold. This explains why people prefer to hold money in the form of gold. Gold acts as a hedge against inflation and creates a perception of safety.
3. Portfolio Diversification
Many financial experts are of the opinion that gold can be a good option for portfolio diversification, as it has low to negative correlation with other major classes of assets. In fact, it has been observed that when the value of shares or other assets falls, the price of gold may experience an upward movement.
Gold offers a kind of protection to your portfolio against market volatility, as several macro and microeconomic factors that affect returns from other assets have negligible effect on the value of gold.
4. Provides Security During Geopolitical Crises
Gold is often labeled as the ‘crisis commodity’, as it provides security against both financial and political crises. The price of gold appreciates during geopolitical instability and uncertainty when the value of other assets usually depreciate.
5. Provides Liquidity
When required, gold can be liquidated much faster than other physical and financial assets. Except for sovereign gold bonds, there is no lock-in period in investments made in gold. So, it can be liquidated easily.
6. The Global Supply of Gold is Shrinking
The stock of gold is limited and nowadays, fewer gold mines are being unearthed, as the costs of exploration and mining are increasing. But, the demand for gold has been rising for various reasons. The rising demand coupled with shrinking supply means that the value of the existing stock of gold could rise further. This again makes it an attractive investment.
It is true that investing in physical gold does come with issues like storage, security, and to some extent, liquidity as well. But today, we have the option of investing in paper gold like equity-based gold funds, gold exchange-traded fund, funds of funds, sovereign bonds, etc., apart from investing in physical gold. Financial planners are also of the opinion that paper gold makes a better investment option than physical gold.