Gold a popular savings/investment option:
Gold can be an ideal investment instrument if you are looking for a long-term investment with high returns.
Investors always look for investment options that provide high returns and stability even during uncertain economic times. While many instruments offer high returns, they fail to perform in volatile market conditions. Gold, however, is the only asset that has continued to offer both benefits for years.
The popularity of gold as an investment option has increased manifold due to the security it ensures.
Let us have a look at some of the reasons why investing in gold can be profitable.
Gold has a long history of retaining its value in the market even when other options depreciate. It was used as a global currency for a long time, and now serves as an instrument to hedge investments against inflation, recession and uncertain economic times.
Due to the value retention characteristic of gold, people turn towards it when the value of the national currency dips. This leads to increase in demand, which in turn, raises gold prices, giving investors reasons to cheer.
The supply of gold is limited because it cannot be artificially produced. It is this scarcity of supply that pushes gold prices up and makes it a lucrative investment option.
Ever increasing demand:
Gold has always been in demand in India due to its stability as an investment instrument as well as the cultural significance of the precious metal in festive occasions like marriages. The growth of emerging markets has further boosted its demand. This ever rising demand has ensured that the price chart of gold keeps moving north consistently.
Apart from these benefits, gold can also help investors diversify their investment portfolio. Although the prices might seem a little volatile in the short-term, gold can be an ideal option for long-term investment.
Ways in which one can invest in gold in India:
There are various ways in which you can invest in gold. Before you opt to buy the precious metal, you must know the pros and cons of each type.
Research proves that gold is one of the most popular forms of investment in India. The cultural significance of the metal also plays a significant role in its popularity. There are several ways to invest in gold and each has its own advantages and drawbacks. Here’s a look at them:
The most common and popular form of investment in gold is the physical form. This is the oldest and most trusted type of investment where gold is purchased by investors. It can be bought in the form of coins, bars and jewelry.
However, certain risks are associated with this form of investment. Storing physical gold at home increases chances of burglary and theft. If stored in bank lockers, one has to pay a certain fee for such a service. Moreover, one also has to pay additional labor cost if it is purchased in the form of jewellery.
Gold Exchange Traded Funds (ETFs):
Gold ETFs are a type of funds that invests your money in pure gold. This eradicates the need to buy and store physical gold in order to benefit from its growth in value. The brokerage to be paid while buying a gold ETF is also very low. Besides, there many tax benefits of investing in this form of gold.
Gold funds and futures:
Certain mutual funds invest your money in companies that are involved in gold-related businesses.
Usually referred to as gold funds, this category of investment is independent of gold prices in the market, as the funds are usually invested in companies that mine, extract or fabricate gold.
Gold futures, like gold ETFs, invest your money in pure gold, but the investment is made only for a short term. This type of investment has also grown in popularity in recent years, but the short-term nature of the investment makes it a slightly more risky proposition than other forms of investment in the metal.
Factors that influence gold prices:
A variety of factors influence the price of gold in the global economy. Read on to know more about these factors.
Gold is a popular investment option that has traditionally yielded good returns. However, gold prices have a tendency to fluctuate. As a result, investors in gold futures and physical gold need to keep a close watch on the prices.
A number of factors contribute to the changes in gold prices. Mentioned below are a few of them.
Demand and supply
Gold prices are essentially determined by the demand and supply of this precious metal. The price of gold is on the rise continually due to its high demand and finite supply. Apart from an investment instrument, it is also used widely for industrial purposes due to its high resistance to corrosion and thermal conductivity. In light of the supply, persistent increase in demand causes the price to go up and vice versa.
Another factor that influences the gold prices the world over is the strength of the US dollar. If the dollar weakens, investors around the world begin to sell the currency and buy gold for security. This causes a jump in demand and consequently, a rise in gold prices. On the other hand, when the US dollar strengthens, it causes a fall in demand for gold.
Central banks and mining companies
Central banks and mining companies usually hold large reserves of gold. They buy and sell this precious metal according to the movements of their currency and the overall economic scenario. Drastic changes in the price of gold are mainly due to frequent transactions by these bodies.
One of the most crucial factors influencing the gold prices is the state of the global economy. When the economic situation is weak with most investments providing low returns, investors are likely to put their money in gold, as it is known to perform well during crisis situations.
While these are some of the major factors that affect the price of gold, there are several others like trading and speculation, national emergency situations, increase in per capita income, government policies, etc. that play an important role in the process.
Correlation between gold prices and stock market performance:
If the past performance of these instruments is anything to go by, there is a deep connection between the two.
While there is no accurate theory that brings out a concrete correlation between the value of gold and the performance of the Indian stock market, a brief look at the history of investing habits of Indian investors paints a complicated picture.
In the 70’s, the value of gold soared significantly, while the stock market remained flat. However, in the two decades that followed, gold prices remained comparatively stagnant, and the stock market gave exceptional returns. From the above data, it can be derived that these two shared an inverse relationship until 2002.
But such a relationship ceased to exist after 2002. Both the instruments moved upwards in tandem for a few years. They gave investors an opportunity to benefit from the bull market until the global recession of 2008, the year when stock markets around the world collapsed, and gold too gave very moderate returns.
Though cyclical in nature, there was a certain connection between the two instruments until 2008. But post the recession, gold continues to offer good returns continually till today, while the stock market remains volatile; this indicates that there is little correlation between both. It would therefore be futile to invest in one instrument today by simply observing the performance of the other.
If you are considering both instruments for investments, financial experts suggest having a balanced portfolio, which consists of not only stocks and gold, but also other avenues like fixed deposits, bonds, etc.