20% of investments can be in gold to protect your savings – Here’s why

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December 14, 2020 11:38 AM

The major benefit of saving in gold is that it protects the savings from erosion of the purchasing power of goods and services over decades.

gold, investments, savings, US Fed stimulus, equity, bond, FD returnsWith the global lockdown due to the COVID 19 pandemic, there was a flight to safety towards gold.

Post the US Fed stimulus, the interest rate environment has remained benign but with the risk of inflation still on the horizon, gold prices have rallied this year. But, of late, the safe haven of investments, gold, seems to be facing a rough patch amidst the news of the COVID-19 vaccine. After reaching a high of nearly Rs 56,000 per 10 grams, gold prices are currently hovering around Rs 50,000.

So, what could have led to the fall in gold prices in India in recent months? “With the global lockdown due to the COVID-19 pandemic, there was a flight to safety towards gold, resulting in the steep increase in gold prices and steep fall in equity, bond and FD returns. However, with the recent announcement of the impending launch of a vaccine against COVID-19, there has been some correction in the gold prices,” says Sanjeev Agarwal, Director, Dvara SmartGold.

Predicting the future gold price may be a futile exercise as several global factors could be at play. However, there are enough probable grounds that may indicate a rising trend in the gold price. “Due several current economic conditions such as the slow recovery of the manufacturing sector globally, the investment demand for gold will continue for some time. As per the analysis by several Bullion Gurus, gold is expected to move up to a level of US% 2,100 (equivalent to about Rs 56,000 per 10 gm). The lifetime high levels of US$ 2089 per oz was reached on August 2020,” informs Agarwal.

Money lying in bank savings account over a long period of time is certainly not the right way. Letting the funds earn a better risk-adjusted return may be looked at by the investors. Agarwal explains with an example – “Over the last 10 years, gold prices in Indian Rupees has increased by 150%. For instance, if a person saved Rs 1,00,000 in gold in 2010, he would receive Rs 2,50,000 if he sold the gold now. But if the same amount of Rs 1,00,000 was lying in a Savings account, with interest it would amount to about Rs 1,50,000 approx.”

But, obviously, all your savings cannot go into gold. One needs to diversify savings across asset-classes such as equities, debt, real estate and gold. “The major benefit of saving in gold is that it protects the savings from erosion of the purchasing power of goods and services over decades. As per the analysis done by World Gold Council, with savings in 100 gms of gold you could buy the same quantity of products or services that you could have bought 300 years back. Hence it is recommended that about 20% of the saving is in gold to protect the savings from erosion in the purchasing power and protect the savings portfolio from the volatility of the stock markets,” says Agarwal.

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