Gold is one of those assets which is always in high demand due to its liquidity and strong return potential. Gold is used for consumption and investment purposes in India. It has always had huge investment potential, even though physical gold does not earn any interest for the holder. It has an inverse relation with the stock market.
When the market is turbulent, people look for safer assets, and as a result, the price of gold increases. Traders use these situations to book profits.
Today you can trade in physical gold and virtual gold using various trading platforms. Read on to find out why it is beneficial to invest in gold.
10 Reasons to Invest in Gold
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Gold is a store of value
Gold has a vast storage value. Its actual value does not deteriorate with time, and you can sell or exchange this asset at the prevailing prices. The shelf life of precious metals like gold, silver, and platinum is perpetual, so you can store gold for an extended period and monetize it in times of need.
For example, gold coins issued by rulers of ancient and medieval India have great value to date and can be sold or exchanged in the markets.
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Acts as a hedge against inflation
The primary reason individuals treat gold as an invaluable investment option is that it acts as a solid hedge against inflation risk. Inflation reduces the purchasing power of currencies over the years, so individuals with significant cash investments are likely to lose value over time.
That said, gold has outpaced the inflation rate; having some investments in gold is expected to protect individuals from risks associated with inflation. Individuals may go for investments in safer assets like gold in a developing country like India, as inflation rates are highly volatile.
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Tangible asset
Gold is a physical asset having specific characteristics that provide a sense of safety among investors. It does not come with any risk of degradation because of fire, water, or time. Unlike other tangible assets like real estate, gold does not have significant maintenance costs. It is safer than digital assets as one cannot hack gold. Gold is not reliant on internet services. Hence, the precious metal may be a lifesaver when online tools are non-functional.
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High liquidity
Gold as a physical asset comes with high liquidity. It is straightforward to buy and sell gold compared to other tangible assets like land or building. One can easily convert gold into cash, and this characteristic makes gold investments a lifesaver during a time of crisis. It is also easy for individuals to buy gold as adequate checks are imposed by the government, which adds to its credibility.
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Helps in portfolio diversification
Individuals can add gold to their asset portfolio to ensure diversification and make the portfolio resistant to market risks. Gold acts as an efficient portfolio diversifier because it has a low or negative correlation with other asset classes.
Gold reduces volatility in a portfolio as both micro and macro factors affecting other asset classes do not influence the price or value of gold. Hence when the price or value of other assets in a portfolio falls, gold will act as a saviour and ensure that the portfolio value is not severely impacted. Individuals can make a gold investment plan to mitigate risk and maximise returns.
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Gold comes with no counterparty risk
One of the biggest challenges faced by parties involved in contractual obligations is how to ensure that the contracts are honoured. This problem is negated when one is dealing in gold. Gold bullion will always have value no matter the economic situation of a country or a company. Hence, there is no counterparty risk.
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Safe investment during a political crisis
People often wonder, is gold a good investment? And their queries get resolved when they see how gold protects investors during political instability.
Whenever the confidence in governments is low, people tend to flock to gold as it is a safe investment option. During these times, gold provides stability and better return prospects than other investment alternatives like stocks and bonds.
As tensions rise, stock markets take a beating, and gold prices move in the opposite direction of other financial assets. Thus, investing in gold can be profitable for investors.
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Mortgage value
One may get loans against gold bullion very quickly. Individuals can use their physical gold as a mortgage to receive a loan from any lending institution. Loans against gold are secured loans. Hence, they come with lower interest rates as compared to personal loans. After one has successfully paid off their loan, banks or other lending institutions will give back the pledged gold to borrowers.
As yellow metal does not degrade with time, the borrower does not need to worry about the loss in value.
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Can be quickly passed on to future generation
You can transfer gold available as a physical bar or ornaments, to the next generation without any hassle. This is a traditional practice in our country; you will find people gifting gold ornaments to their children or grandchildren at their wedding or any other significant life event.
This practice helps individuals have a financially secure future as they can encash the gold ornaments if they face any crisis.
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Supplements other investments
They are investing in gold supplements and other investments one has made in different asset classes. The performance of other investments, such as those made in stock markets and real estate, is subject to high volatility and is influenced by several micro and macroeconomic factors. Hence, it becomes difficult to predict their performance accurately.
On the other hand, gold acts as a shock absorber and protects investors from volatility associated with other assets.
Final Word
Individuals can invest in gold in many ways – one can go for a pure physical gold bar or buy readymade jewellery from any store. Alternatively, individuals can invest in gold via online platforms from the comfort of their homes without any hassle.
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Frequently Asked Questions
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What is SGB?
Sovereign Gold Bonds or SGBs act as an alternative investment plan for physical gold. RBI issues these bonds. Sovereign Gold Bonds are government-backed securities that are denominated in grams of gold. Buyers pay cash for these and receive fixed interest.
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What is digital gold investment?
This type of investment allows you to digitally buy a pure form of gold. When you invest some amount, you do not receive the physical metal, but the seller stores an equivalent amount in a secured vault and provides an invoice. You can sell your gold anytime at the prevailing price.
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What is a Gold ETF?
Gold-based ETFs are investment options that track the price of physical gold, and they invest in gold bullion.
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