From buying gold coins to gold ornaments to gold biscuits, there are several different options for investing in this royal metal. However, what actually is the purpose of investing in gold? And, should investors bother investing in the gold market – are two main questions that have divided the opinions of the gold investors in the last few decades.
One school of thought says that gold is only a priced metal that is used for making jewelry. On the other hand, the second school of thought considers gold as an asset that has various useful qualities, which make it necessary for investors to have it in their investment portfolios. Today, we are going to discuss the purpose of the gold in this modern era and why it should be in the investors’ portfolios, including the various ways to invest in the gold market.
However, before starting these topics, let us understand the history of gold:
A concise history of gold
To understand the sole purpose of gold investment, one must know the history of gold and gold market. The gold was discovered around 3000 B.C., when the ancient Egyptians started making jewelry and it was the year 560 B.C., when gold started acting as a currency. That was the time, when merchants wanted to have a standardized currency, which can simplify the trade of money. Since gold jewelry was widely recognized and accepted throughout different parts of the world, the creation of gold coin with a stamp of the seal answered the question.
Therefore, with advancement of gold as money, its importance grew uninterruptedly and not only Europe, but Asia, Africa, and America also started symbolizing gold as wealth and the gold rate today is Rs. 32941.18/10 grams.
However, this standard of the gold did not last forever, and it was the year 1900 that led to the shift of the gold out of the monetary system of the world.
The importance of gold in current economy
Knowing the fact that gold no longer works as currency in the modern time, it still has some importance. Let us discuss a few of them:
- Gold saves wealth: One of the reasons is that gold in the modern era is – it preserves wealth throughout generations. But, the same cannot be said for paper currencies.
- Use gold as hedge against declining value of money and increasing inflation: In the modern economy where the value of money is declining day by day and inflation is rising rapidly, gold is serving as hedge against both these scenarios.
- Gold as an asset to pay dividend: If one has a good stock of gold, even a slight increase in the gold price may work as boon for him/her. In this way, gold pays a good dividend.
Till now, it is perhaps clear to everybody that what the purpose of gold is and the explanations of ‘should investors bother investing in the gold market or not’ are mentioned below:
Should investors invest in gold?
Experts like Warren Buffet say that it is ‘stupid’ to invest in gold. This is because investing in any form of gold, such as bars, coins, and ornaments, comes with problems like storage, liquidity, and safety. Moreover, whatever you earn through this investment entirely depends upon the price of gold. If the price of gold is rising, you will earn more and if falling, you will earn less.
On the other hand, investing in some other equity, such as mutual funds, stocks, or real estate, offers more benefits. When you have invested in real estate, you earn income through rent, whereas investing in mutual funds gives you benefits in terms of interest. However, with gold, which sits at one place, there is no guarantee of regular returns or benefits.
Apart from this, the prices of gold are negatively proportionate to the equity. To understand this, let us take an example. If we take the data of past 20 years, it can be seen that Sensex has given a return of approximately 12.3% annually, whereas the gold has gained 10.05%. Additionally, in last 10 years, gold has given the return of 5.82%, whereas equity has earned the return of 10.4%. And, in past one year, the Sensex has risen up to 16.3%, but gold gained 6.44%. And, the gold rate today is Rs.32941.10 for 10 grams.
The Bottom Line!
The point to be noted here is that gold is not always the best investment instrument. However, there are advantages with every investment. And, if you are concerned in having more physical gold, purchasing shares of gold mining company cannot solve your problem. Instead, try to invest more in gold coins, jewelry, gold bullions, etc. But, it is suggested to prefer gold for future consumption than considering it as an investment today.
Experts suggest allocating not more than 5-6 percent of your portfolio in gold. It is advised to invest your hard-earned money in equities like smart systematic investment plan and mutual funds rather than in gold. It is because equity not only will give you the best returns, but you will also enjoy the benefits of compounding.
Disclaimer: This is a guest post and it doesn’t represent the views of IWB.