Is digital gold a safe haven during a global economic crisis? | The Financial Express

Is digital gold a safe haven during a global economic crisis?

World over, new age investors are waking up to digital gold; a hassle-free, storage-proof, quality-assured, and easily accessible version of the yellow metal.

Is digital gold a safe haven during a global economic crisis?
With the advent of technology, gold investors have access to this store of value in a new form – digital.

For millennia, gold has served as a universal indicator of riches across cultures and the world. The precious yellow metal has been used for money, jewellery, and other decorative arts for as long as records go. Historically, gold has shared a unique relationship with the markets. When the markets have skyrocketed, gold typically has undergone a drop, even if by only a margin. When these same markets have plummeted, gold prices typically increase, possibly on the back of a surge in demand as investors resort to safer havens.

Examples from the last couple of decades also reaffirm this point. Consider the 2008 financial crisis as an example. As a result of the subprime mortgage crisis, many important indices all around the world saw significant losses, including the Indian benchmark indices, which had plunged to record lows during the 2008 fiscal crisis, signaled by the Lehman Brothers’ bankruptcy. In fact, between January 2008 and February 2009, in India, the S&P BSE Sensex dropped more than 50%.

At the same time, the world witnessed gold prices soaring from slightly over $700 per ounce to $1900 per ounce by October 2011. Global equity markets were erratic during this three-year period, and investors heavily relied on gold as a stable store of value. As the stock markets stabilised after 2011, the price of gold began to fall. This same phenomenon has been observed even in more recent years, like when the pandemic resulted in compromised economic activity and a poor labour market. The Indian government kept bond yields low as a result. Gold prices underwent an increase of 24.6 percent over its earlier year.

With the advent of technology, gold investors have access to this store of value in a new form – digital. World over, new age investors are waking up to digital gold; a hassle-free, storage-proof, quality-assured, and easily accessible version of the yellow metal. For the digital natives of today, quality assured digital gold can be conveniently purchased or sold at the tap of a button, right from the comfort of their homes, which is then assigned to the purchaser and stored in a world-class gold storage facility by the digital gold provider. Not just history, but also technology makes digital gold a preferable investment option in times of economic downturns. Let’s look at the reasons why.

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Investors may purchase bonds to increase their returns on investment when there is a growth in the GDP. An investment in a company might potentially earn an investor a dividend- a set amount of profit from the business each quarter. However, during an economic downturn, there is a greater risk that some business might experience losses and go bankrupt. An alternative investment to consider therefore is digital gold, because gold is a commodity and has value. The digital version can be sold liquidly for a profit in times of stress and need.

Investors may purchase shares of an organisation when the GDP is expanding since the increase in share value often immediately affects earnings. However, if the company’s stock price declines during recessions, the investor stands to lose wealth. For example, the Sensex value was approximately 40,000 a few months before the pandemic and fell to 25,000 during its onset.

A major chunk of retail Investors also strategically choose fixed income strategies like a Public Provident Fund Account (PPF), savings deposits, etc. to get a fixed rate of interest on their investments. However, during a recession, central banks reduce repo rates, including the RBI in India (currently, it is 4.9 percent in India). As a result, the interest rates on the investors’ fixed income deposits also get reduced. After inflations these returns pale further. Hence, even for these investors, during the recession, digital gold can be regarded as a safe alternative.

A historically consistent store of value the world over, investors have, for generations, rightly placed their trust in gold. Now with the advent of digital gold, investors can get the much-needed instant flexibility and liquidity, making this new-age version of the yellow metal a wise option for investment during economic downturns.

(By Ashraf Rizvi, Founder & CEO, Gilded)

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