The phrase ‘Go for Gold’ sounds like an inspiration message to give our Olympic medal aspirants as they try to bring glory to the country in their respective field of sport. But the yellow metal is as important to the world of investing as it is to the world of sport and here’s why.
Gold has been the traditional precious metal since ancient times, take any civilization and the gold coin would be the epitome of wealth and power. In India especially the allure of gold still holds true with India being the largest consumer of gold for decades, before China decided to step in and their central bank – the People’s Bank of China started buying gold in bulk. If one was to look at data from the 4th quarter of 2019, before the advent of COVID; India consumed approx. 136.6 tonnes of Gold while China was at 132. 1 tonnnes.
Even traditionally, humble citizens like us from both India and China – during festivals like Diwali and the Chinese New Year respectively- invest in Gold through jewelry or coins. The shine of the yellow metal is yet to dim in the two most populous countries of the world.
Gold as an Investment Option
There are evangelists for Gold as an investment option the world over where people believe that one needs to diversify at least 5-10% of their portfolio in the yellow metal. The main reason for this being that gold is expected to be ‘inversely proportional’ to equities. This basically means that when equities go down, the price of gold tends to go up and vice versa.
This is a simple Economics demand-supply rule at work. When markets crash it is human nature to look at other avenues of investing. Gold is one such avenue, so when the supply of gold is relatively stable, the demand for it increases when markets fall, as a result the price of gold goes up. When markets are doing well, there is less perceived need to search for alternative; again, supply is constant demand goes down – so does the price.
Hence financial experts usually recommend you to have at least 5 to 10% of your portfolio in Gold. This helps contain the downside risk in case of a market crash through diversification in a less co-related asset.
The Family has More Than Enough Jewelry – Do I need to Invest?
Yes you do! The jewelry that you purchase is for ornamental purposes and attracts a making charge. When you try to sell that jewelry you will not get the exact same price of gold but a little less than what the price of gold for the day is.
Then there is the question of purity, different grades of purity attract different rates – so it is very difficult to gauge the value of jewelry you own. Since the exact value of the jewelry cannot be ascertained – it becomes very difficult to apportion an exact amount of the invested amount to the same. Therefore a more efficient way to buy Gold is either through Gold Exchange Traded Funds /Gold Fund of Fundsissued by various mutual funds or the RBI issued SGBs or Sovereign Gold Bonds.
What About Silver or Platinum?
The issue with both is the demand-supply gap. For silver, demand is the main issue. Since silver is also used in industries and for ornamental purposes – there is huge swings in price. If the demand from the industry goes up, then price shoots up and likewise if industry demand is down then consumer demand for silver is not high enough to maintain price levels and they come crashing down.
Platinum is the other end of the spectrum with supplies of the precious metal being very low – demand is more for ornaments etc.
So the one commodity that satisfies both demand and supply balance, along with retaining a store of value since the ancient time is gold.
Diversify your portfolio by investing in Gold.
If you have any queries on diversification of investments or otherwise please feel free to write to us on Info@EpsilonMoney.com or call us on +91 22 500 54 260.