This article talks about the importance of having Gold in your investment portfolio.
We love Gold…
Indians are known to be gold buyers. Indians buy more gold than people from any other country. Here are some interesting and eye-opening facts:
- Indians bought over 700 tons of Gold in the year 2006
- India accounts for 18% of the annual global demand for Gold
- Indians own more than 14,000 tons of Gold – mostly in the form of jewellery. This is around 10% of the entire world’s gold stock!
- Gold owned by Indians is more than the gold held by US, French and German governments put together!
Well, clearly, Indians love gold! But is Gold used as an investment? Well, no. As we discussed, most of the Gold held is in the form of jewellery – Jewellery accounts for around 73% of India’s gold demand.
Of course, holding gold in the form of jewellery is not the optimal way of investing in gold. (Please click here to read more about it in “Have you invested in jewelery?”) But having gold in one’s portfolio is definitely desirable.
So, let’s discuss the importance of Gold as an investment.
Why should you have Gold as a part of your portfolio? Why should you invest in gold? Here are the reasons:
Negative correlation with other asset classes
Gold has strange price movements – when the price of everything else (like oil, real estate and stocks) is rising, the price of gold is usually subdued. But when the price of other assets is going down, the price of gold strengthens!
This is because gold is seen as the safest investment – even safer than investing in government backed securities! Therefore, when the price of other assets is going down, people start investing in gold for safety.
Hedge against downturns
Because of its negative correlation with other assets, gold is also a preferred investment in times of economic slowdowns. When there is a downturn, price of all other assets decreases, as people lose faith in the future of the economy. But since gold is safer even compared to government bonds, people start buying gold as a hedge. And due to this reason, the price of gold increases in the time of economic slowdowns.
Therefore, if you have gold in your portfolio, you would be hedged against economic slowdowns to that extent.
Hedge against inflation
On an average, Gold beats inflation by a small margin over the long term. Historically, Gold has given a return of around 7% per year. Although this is not spectacular, it is definitely inflation beating. Gold has maintained its purchasing power over several millenniums!
Gold investment acts as an insurance policy against inflation and economic slowdowns. Considering the benefits offered by gold investment, it is comforting to know that at least you are not paying for this insurance!
If you have gold investments, you would lower your overall returns during the times of economic booms, but at the same time, you would preserve your returns in times of economic slowdowns – that’s the tradeoff we have to make!
Thus, we can safely conclude that gold should be a part of everyone’s portfolio.
How much should you invest in gold?
The next question would be – How much? What percentage of your portfolio should be invested in gold?
Well, as a rule of thumb, you should invest around 5% of the portfolio in gold. This investment in gold would act as a solid pillar or core of your portfolio, giving it the strength to withstand economic fluctuations with minimal impact.
Of course, this is only a rule of thumb. The actual investment in various assets depends on many factors. For more details, stay tuned for the article “Asset Allocation”.
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