Looking for safe investments? Is Gold the right option for you – Find out
Updated: Mar 04, 2021 7:16 PM
Gold is not only an ideal source of diversification for an investor’s portfolio but also provides a foundation that investors rely on to manage risk and preserve capital more proficiently, especially in times of financial chaos when stability is most needed.
Another route of investing in gold is in one of the gold-based exchange-traded funds (ETFs).
Gold, also called the yellow metal, has held society’s fascination since the beginning of recorded time. Empires and kingdoms have been built and destroyed over gold and mercantilism. As societies progressed, gold started getting universally accepted as an acceptable form of payment. The United States’ monetary system was based on a gold standard until the 1970s.
The interesting aspect of gold is that, unlike other commodities such as oil or grains, it does not get used up or consumed. Once gold is mined, it remains in existence. On the other hand, a barrel of oil is turned into gas and other products that are expended in vehicular or aero engines. Grains are consumed in the food that humans and animals consume. But gold can be turned into jewellery, used in art, stored in ingots, locked away in vaults, and applied to a variety of other uses.
Regardless of gold’s final destination, its chemical composition is such that the precious metal cannot be used up – it has permanency.
The easiest way to gain exposure to gold is through the secondary exchange, or the stock market, via which one can invest in actual gold bullion or the shares of gold-mining companies. The information about their prices is readily available in global financial publications. Also, gold coins are often minted in smaller sizes, making them an attractive investment proposition.
However, the main problem with gold bullion is the storage and insurance costs. These along with the relatively large mark-up from the dealers erode the potential of earning more profits. Additionally, buying gold bullion is a direct investment in gold’s value, and each dollar/rupee change in the price of gold will proportionally change the value of one’s holdings. Other gold investments, such as mutual funds, may be made in smaller dollar amounts than bullion, and also may not have as much direct price exposure as bullion does.
Another route of investing in gold is in one of the gold-based exchange-traded funds (ETFs). Each share of these specialized instruments represents a fixed amount of gold. These funds may be purchased or sold just like stocks, in any brokerage or Demat account. This method is, therefore, easier and more cost-effective than owning bars or coins directly, especially for small investors, as the minimum investment is only the price of a single share of the ETF.
Thus, gold is not only an ideal source of diversification for an investor’s portfolio but also provides a foundation that investors rely on to manage risk and preserve capital more proficiently, especially in times of financial chaos when stability is most needed.
Due to the value of this precious metal and its importance, gold can be influenced by a variety of factors. Like gold, the price of crude oil is determined in the US dollar. When the US dollar rises, dollar-denominated assets usually drop in price, as investors of other currencies find dollar-denominated assets more expensive. Because gold and crude oil are dollar-denominated assets, they are strongly linked.
As crude oil prices rise, inflation also rises. Gold is known to be a good hedge against inflation. The value of gold only increases when inflation rises. Gold and crude oil are further related in that a rise in the price of oil dampens economic growth due to its excessive industrial use. This diminished economic growth adversely affects most industries. This can lead to a negative impact on equity markets, which in turn boosts the demand for alternative assets such as gold.
Repo rates are negatively correlated with the price of gold. The repo rate increases as the gold prices decrease. This is because an increase in the repo rate reduces the flow of money in the economy and purchasing power of consumers decrease.
by S. Ravi, Former Chairman of Bombay Stock Exchange, Founder and Managing Partner of Ravi Rajan & Co.