When you are looking for investment avenues to park your funds or appreciate them over more extended periods, you can’t ignore a particular asset class. This asset class has a track record of consistency, performance, and compounding the capital for decades—an all-time-favorite of investors- the precious metal Gold.
In our previous article, we had identified the appreciation of Gold as a possible scenario and an opportunity for retail investors. Hence in this article, we will explore the case of Gold being an investment and how do retail investors systematically allocate their funds towards this asset for capital storage and appreciation.
The history of Gold dates back to 40000 B.C. when the very first artifacts made their appearance in Egypt, where the oldest known gold mine is also known to have originated. Even at its origination point, the Gold was associated with a variety of expressions, most often associated with high intrinsic worth. Great human achievements are frequently rewarded with Gold in the form of medallions and trophies. Even in mathematics, perfect or divine principles are used regarding gold, such as the golden ratio and the golden rule. The metal is also associated with the wisdom of aging and fruition. Even the height of an entire civilization is referred to as “The Golden Age.” The psychosis associated with Gold goes a long way in deciding the trend of its prices.
Gold played an essential role in the Bretton Woods system, where the Gold was the basis of the U.S. dollar, and other currencies were pegged to the U.S. dollar value. The decision was primarily taken with the viewpoint of economic security in the post-world war. During that time, the importance of Gold increased exponentially, establishing it as one of safest asset classes in the world. Even after the Bretton Woods system was discontinued, many central banks across the globe continued to hold Gold in their reserves, ensuring safety of their financial systems.
In the modern era, the most common benchmark for gold pricing is the London gold fixing, a twice-daily telephone meeting of the representatives from the five bullion trading firms of the London Bullion Market. Furthermore, Gold is traded throughout the world based on intra-day spot prices derived from Over-The-Counter gold-trading markets around the world. In the short term, gold prices are a function of the derivative positions in the market, while in the long run, they tend to depend on GDP growth rates, inflation and the global gold supply versus demand.
The consumption for Gold primarily occurs in 2 nations, i.e., India and China. China accounts for nearly 30% of the consumption, while India contributes 23% to the demand. Among all the consumption products of Gold, jewelry accounts for over two-thirds of the annual gold demand. India is the largest consumer of jewelry in volume terms.
The production trend of Gold has been on an increasing trend since the 1880s. As per the World Gold Council, nearly 187200 tonnes of stock remains in existence above ground. This would put the value of the Gold in the world above ground at about $8.7 trillion.
Reasons to Invest in Gold:
With all the above basics known, we now look to understand why Gold is a lucrative investment for a retail investor. The factors involved are:
- Safety- The safety associated with Gold is second to no other asset class. Traditionally Gold has been preferred as one of the safest storage of capital. There is a profound fundamental reason for this. The central banks across the world have to keep forex reserves to maintain the balance of payments. Since foreign currency is subject to fluctuations, central banks hold a good part of their forex reserves in the form of Gold. In the present scenario, various countries like Russia and China want to reduce their exposure to USD (due to these countries being adversaries of America) and have about $4 trillion of reserves to park. They would not want to do it against Yen or Euro due to wider fluctuations. In such a scenario, only one asset class exists that can serve as a safe store of value. With such a massive backing by central banks across the world, Gold will continue to appreciate and offer a safe haven for investors. Also, Gold is the only asset class that carries a zero default risk. This makes Gold even a more lucrative investment for retail investors.
- Liquidity- This trait is especially applicable in India. Gold is one of the most liquid asset classes available to an investor. It can be converted in cash at any gold shop in the country, even in the remotest village. This unique trait of Gold makes it one of the most sought-after investments in the public.
- Returns- The returns of Gold have been spectacular over the last two decades. In 2000 the Gold was available at Rs.4400 per 10 grams. In 2020 it is worth about Rs.45000 per 10 grams. As an example, if my father had invested a sum of Rs.100000 at the time of my birth in 2000, the amount would have grown to Rs.10, 21,273 at a compounded growth rate of 12.32% per annum. These returns beat the Sensex, Nifty, and even NASDAQ by a considerable margin.
For retail investors, a lot of avenues exist to invest in Gold. They can be broadly classified as”
- Bars- The most traditional way of investing in Gold is by buying gold bullion bars. Bars usually have a lower priced premium than coins.
- Coins- Gold coins are another common way of owning Gold. Coins are priced according to fine weight along with a small premium based on supply and demand.
- Digital Gold- This new model of investing in Gold is gaining a lot of popularity. Investors can invest as little as Rs.1 in Gold and store the Gold in a digital locker. They can redeem it as well by selling it and the amount being credited in their bank accounts accordingly.
- Jewelry- Investing in Gold through jewelry is native to Indian society and one of the most innovative ways to invest with jewelry serving both as an investment and a decorative.
- Exchange- Traded Fund- ETF’s are available to invest in Gold which tracks gold prices and deliver appropriate returns to the ETF holder.
- Gold Companies- Investing in companies that have a business exposure to Gold is one of the most lucrative ways to make money out of Gold. During times of stability, due to general market action, these companies will give steady returns. During recession times, the spike in gold prices will cause these companies to perform relatively well in comparison to their peers.
Investment strategy for Gold:
We have clearly seen how psychological factors, macroeconomic factors, and the characteristics of gold play roles in the long term price action of the commodity. The returns of Gold and the Indian benchmark Sensex has roughly been the same for two decades. This makes Gold an indispensable part of any investor’s portfolio. We highly recommend investing 10% of your investible income in Gold every month. While investing, the following things are highly recommended:
- Invest in physical Gold, as it ensures the safety of returns and protection against the collapse of the financial instrument you are using to invest in Gold
- While investing, coins must be preferred over bars as coins can easily be verified for quality, larger bars cannot be verified for the same, and there is a probability of forgery.
- If you are looking to invest in a gold company, a thorough analysis must be done. Management checks are essential to protect capital. Companies with a good reputation are preferred. It is worth noting that an investment in a gold company is like a shield to your portfolio during recessions, for ex- Ace Investor Rakesh Jhunjhunwala’s Titan holding.
With all the above practices, you are now ready to invest in Gold and are on the right track- the low-risk path to stupendous wealth.
By- Akshay Vyas