Is gold a good long term investment?


One of my earlier articles described how Indians love buying gold and different ways to invest in gold. To put to perspective, Indians purchased over 500 tonnes of gold in 2020, worth Rs 2.3 lakh crores (approximately $30 billion). And, the gold demand in 2020 was the lowest in the decade, which essentially indicates that gold is one of our favourite assets. More than half of the demand is for investment purposes. In other words, it is safe to assume that gold is one of the most prominent investment avenues. However, have you ever wondered, is gold a good long term investment?

A bit more

Investment in gold happens in various forms, such as jewellery, coins, physical bars, digital format, etc. Moreover, gold is for special occasions, regular consumption, investment purpose, or defined future use. In other words, investment in gold is utterly typical in India, happens for various purposes and in multiple forms.

Further, a family gold reserve is often a matter of pride. For example, it is ubiquitous for Indians to have seen their grandparents or parents buy and accumulate gold. To have seen gold gifting to the bride (or groom) during a marriage. To have participated in the purchase of gold, even in small quantities, on auspicious days.

Gold acts as an asset to help the family tide over any financial uncertainties. In other words, gold has served as a financial support system for ages and across generations.

However, from a financial planning perspective, gold is like any other investment avenue. Therefore, investors must evaluate investment in gold within a broader ambit of their investment strategy.

Gold as a part of the portfolio

Gold does not have any returns of its own. Instead, the returns result from a change in the price, determined by the demand and supply of gold. Despite being a non-earning asset, having gold as a part of the portfolio is still important. And here are a few reasons:

First, to diversify the investment portfolio.

Second, gold prices increase during turbulent times. In other words, investment in gold is a natural hedge to market uncertainties, whether political or economic. For instance, gold prices zoomed north when the equities market suffered during the 2008-2010 time and during similarly other turbulent times in the past.

Third, there is a limited supply of gold, and we expect the global gold demand to continue to exist and rise.

Finally, like equities, secondary gold markets have existed for a long period. Further, we firmly believe that a secondary commodities market will continue to operate and provide investors with an avenue to trade and invest in gold.

It is essential to note that any reference to gold investment is not to gold jewellery. That is because jewellery comes with additional expenses of making and wastage costs. So instead, investors must buy gold bars, ETFs, mutual funds, etc. In conclusion, investors can consider allocating about 10-15% of their total portfolio in gold.

Is gold a “safe haven”?

Over the years, we have heard (and believed) that gold is a safe asset. However, while we strongly feel this statement to be correct, there are caveats that we must understand clearly.

First, gold does not have an inherent return, as the investor gains from the capital appreciation in the value of gold.

Second, global economic conditions, world demand and various macro factors influence gold prices.

Finally, there is minimal local influence.

Due to these features, gold becomes inherently riskier than assets like fixed deposits, recurring deposits, PPF, etc. In other words, these financial instruments earn interest income, and capital is secure and risk-free. Therefore, gold is only suitable for investors with some risk tolerance, and the ones who are not looking at risk-free options.

Top five benefits of investing in gold

  1. Over an extended period, gold has seen tremendous price appreciation. Therefore, investing in gold is an effective hedge against inflation.
  2. Don’t put all your eggs in one basket. In other words, and from a financial planning perspective, this essentially means portfolio diversification. Gold is one of the many asset classes available to invest in, and investors must take advantage of the same.
  3. The sale of any asset usually attracts capital gains tax. However, the capital gains arising from Sovereign Gold Bonds (SGB) redemption are tax exempted
  4. Gold has a highly active secondary market, and one can quickly sell physical gold in bars, coins, jewellery, etc. Therefore, asset disposal is possible with minimal effort. Consequently, we believe gold usually has high liquidity.
  5. The gold prices keep fluctuating based on market circumstances. And, it is also possible that prices remain subdued for a prolonged period. Eventually, though, the underlying value of gold is stable, as the resource is limited. Therefore, the money stays safe even during the worst times.

Another benefit that we mentioned earlier is that gold prices are inversely proportional to equity prices. Thus, investors witness an increase in gold prices during uncertainties in the market (when equity prices decline).

Understanding the investment timeframe is critical

Historically, equity returns have outperformed gold returns over a long period. However, the reference point is usually from point A (investment date) to point B (sale date).

The world could have turned upside down during the investment horizon, and so would have the returns. Therefore, investors must understand the timeframe to appreciate the actual advantage of investing in gold. For example, gold might have outperformed in the interim when the equity cycle was underperforming. Or when there was a crisis. But unfortunately, a problem of a global magnitude hits probably once in a decade or even less. And it may not be worth it for investors to wait for a catastrophe to strike to avail themselves of good investment returns from gold.

For instance, consider a period between 2000 to 2008, soon after the financial crisis. During this time, while the broader equity market increased by 80% (point to point), gold prices witnessed a 180-200% increase. On the other hand, from 2008 till November 2021, the broader equities market increased 550%. However, gold prices increased only by 300%. In other words, the date of investment and disposal is critical in the determination of returns.

The bottom line – is gold a good long term investment?

Gold is a low to moderately risky asset. In other words, gold is not a full-proof or, say, a risk-free investment. Moreover, gold prices depend on many factors, primarily global and usually tricky for investors to predict or influence. Altogether risk-averse investors should therefore avoid investing in gold.

However, numerous benefits of gold investing often attract investors to include gold as a part of their portfolio. In that capacity, gold investment acts as a means to diversify the portfolio.

Investors must decide based on their investment horizon. For example, typically, during market declines, gold prices tend to go up. Similarly, during an uncertain or turbulent economic situation, gold demand soars and prices rise. Therefore, we believe investors looking to invest for 10-20 years tenure should explore other asset classes, such as mutual funds and real estate, along with gold.

Physical gold comes with storage costs, and the risk of holding does gold exists. Further, making charges are applicable on jewellery. In other words, storage and jewellery making expenses are sunk costs and eventually reduce the return from investment.

Gold is an excellent investment as part of a balanced portfolio for investors willing to take moderate risks​. Moreover, gold investment is considered liquid, especially given the developed commodity markets. Therefore, converting physical gold into cash is possible with just minimal effort and no loss of value.

Above all, gold prices have increased over the years. Therefore, investment in gold does act as a hedge against inflation, thereby protecting the real value of money.

In conclusion, investing in gold is recommended for investors who are not absolutely risk averse as it provides a natural hedge and offers diversification.

Happy investing in gold!

About the author

The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.

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The author has used his knowledge, experience, and understanding of the subject and has exercised extreme caution to avoid possible mistakes. However, the author does not take any responsibility for any error that exists.

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