Gold has been a highly sought-after asset class for centuries for multiple reasons.
There are different types of investment vehicles such as fixed-income securities, stock markets, mutual funds, real estate, commodities, crypto, etc. The investment strategy depends on the primary goal of investment, time horizon, liquidity requirements, risk tolerance, and so on.
Gold remains an attractive investment due to its rarity, durability, and liquidity, historical significance as a medium of exchange, store value, and wealth preservation.
In the past few years, the price of gold has been on the increase. It was $1,150 per troy ounce in October 2015, soaring to $2,748 during the fourth week of October 2024. (One troy ounce is 31.10 grams). The main reason for the recent spike in the gold price is the fear of recession and the geopolitical issues in the Middle East.
Foreign Institutional Investors (FIIs) and Portfolio Managers switch investments from equities to gold for wealth preservation during turbulent times. The investment in gold is a ‘safe haven’ as it offers price stability, a hedge against inflation and currency devaluation.
One important question often confronted by investors is how to invest in gold. One can buy physical gold directly as coins, bullion, or jewellery.
Also one can invest through e-gold which is a digital means.
Investments through mutual fund routes and investment in the shares of gold mining companies are also options available to investors. Gold Exchange Traded Funds (ETFs) are another online option available to investors.
Buying physical gold like gold bars, coins, ornaments, etc. has inherent risks namely purity, safekeeping, theft, loss of making charges on resale, and other factors. Therefore it is advisable to invest in virtual gold rather than physical gold.
In India, the government encourages investment in gold through the Sovereign Gold Bond Scheme (SGBS), a virtual investment. It offers a marginal rate of interest for the investment besides the capital appreciation.
The medium to long-term horizon outlook for the investment in gold is bullish with expectations of continued strength in the market. The technological advancements in mining and the changing consumer demand in the jewellery industry will have a bearing on gold production and price.
Like any other investment, investment in gold is also not free from risks. It does not generate any periodical cash flows like fixed-income securities or dividends. Gold is also sensitive to bond yields as a reverse switch happens when the bond yield increases.
Similar is the case when there is a boom in the equity market. No doubt, portfolio diversification is the need of the hour for a modern-day investor. Hence gold should be considered as a vital component of a diversified portfolio, as a long-term investment strategy.
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