Gold has been in circulation since 560 B.C, both as a currency and precious metal. But when it comes to its performance as an investment tool, opinions are largely polarised. This article aims to debunk some of the major myths around the same.
Let’s begin by answering a fundamental question – where does the value of Gold come from? Consider the recent investment mayhem of Bitcoin, a virtual currency that was being touted as ‘digital gold’. It lost the value of more than $14000 in a single year. Following this, the world went into a frenzy of branding Bitcoin as a fraud commodity that does not hold any real value and is primarily driven by the opinion of people. It is rather hilarious that we all forgot that this is exactly how Gold has functioned since its inception.
Gold belongs to an asset class that is not backed by any performing asset. Its rise in price is purely driven by market dynamics, the sheer belief that someday someone will pay more for it. Compare this with other investment options such as stocks and mutual funds whose returns are directly tied to the functioning of companies. Hence, they give more leeway to investors in terms of value creation.
Historical Performance of Gold
In the past 7 years, the price of Gold in India has appreciated by 19.08%. This boils down to an annual increase of only about 2.72%. In fact, Gold prices consistently dropped from 2012 to 2015.
|Year||Price of gold (INR)|
But further digging also reveals two significant price jumps of 27.5% and 42.7% in 2010 and 2011 respectively. This proves that Gold is not impervious to market volatility.
Major factors that contribute towards this include:
- Stability of the central bank.
- Supply and demand of gold in the market.
- Quantitative easing and government reserves.
- Global political landscape and stability.
Pros and Cons of Investing in Gold
For a holistic picture, it is important to look at both ends of the spectrum.
The advantages of investing in gold include:
- Reliable Diversification Tool: For long-term investors, Gold can function as a befitting diversification investment since it offers stable and expected returns and is not correlated to stocks, bonds, and real estate.
- Hedge Against Inflation: Hard assets, that include precious stones, oil, and gold, prove to be great hedges against inflation since their value remains unchanged over long periods of time.
- High Liquidity: Due to the high demand for the asset, Gold has liquidity close to that of actual currency. This helps in emergencies and instances of portfolio rebalancing.
Apart from lower returns, other disadvantages of gold investments include:
- Lack of Regular Income: Gold does not create value other than in the form of holdings. On the other hand, mutual funds, real estate, and stocks can potentially generate dividends and rents.
- Need for Storage: Physical storage needs in banks can attract additional charges such as locker maintenance and security.
Less Resale Value: Jewellers and other gold dealers tend to deduct 5-10% of the value of gold in exchange for hard cash. This can even increase if the gold has been bought from a third party.