Given the rising gold prices, should you still include it in your investment portfolio?
Deciding whether or not to invest in gold requires careful consideration. If you’re uncertain about incorporating gold into your investment portfolio, it’s crucial to seek expert advice to gain a comprehensive understanding of the situation.
On November 27, 2023, gold prices surged to their peak since May 16, propelled by a dip in the US dollar. The dollar experienced its lowest point in almost three months against a collection of major currencies, enhancing the appeal of gold for investors using alternative currencies.
Furthermore, the anticipation that the US Federal Reserve might initiate monetary policy easing earlier than anticipated contributed to the upward momentum in gold prices. A devalued dollar and reduced interest rates generally favour gold, as it becomes a more cost-effective investment for traders and diminishes the associated opportunity cost.
In light of the significant increase in gold prices, is it still prudent to include gold in your investment portfolio? The response hinges on the elevated gold prices, which have not only outpaced inflation but have also played a role in building a substantial corpus for numerous individuals. Over extended investment horizons, gold maintains its purchasing power. As an asset class, gold has consistently yielded returns that surpass inflation; the greater the inflation, the more substantial the returns.
Why do gold investments still matter?
To understand how gold can enhance the lustre of your investments, reflect on gold prices from two decades ago and then compare them with the current market rate. Now, contrast these with the interest rates offered by conventional savings instruments such as bank fixed deposits and other government-backed savings schemes.
The evolving condition of the nation’s economy has led to a significant reduction in interest rates. This underscores the importance of exploring alternative asset classes such as gold and equities for your long-term investment requirements, rather than depending solely on traditional savings or fixed-income products.
Undoubtedly, gold as an asset class has the capacity to provide returns adjusted for inflation. Hence, it is advisable to include gold as a component of your investment portfolio. Gold prices have experienced a robust surge, climbing over 10 per cent this year and surpassing ₹60,000 per 10 grams. This has sparked speculation that the precious metal may be poised for further escalation.
Several factors contribute to the potential for continued growth in gold prices. Firstly, real bond yields, representing bond yields adjusted for inflation, are diminishing. This makes gold more appealing to investors, as it is viewed as a safeguard against inflation. Secondly, the upcoming wedding season in India is anticipated to drive demand for gold. Lastly, a mounting sense of uncertainty in the global economy owing to the recent geopolitical tensions and powerplay among nations may prompt investors to seek refuge in gold.
A refuge from market volatility
The market has experienced a tumultuous journey over the past year, with the Sensex reaching new highs intermittently only to plummet to fresh lows. This volatility has prompted numerous investors to reassess their asset allocation.
Balancing risk and return is essential in asset allocation, and historically, gold has demonstrated counter-cyclical behaviour, excelling when equities face challenges and vice versa. Introducing gold into your investment portfolio can bolster stability amidst market volatility.
Gold’s counter-cyclical nature serves as a diversifying element within a portfolio, mitigating overall risk. During downturns in equities, gold’s tendency to appreciate can offset losses incurred in other asset classes.
Additionally, this coveted precious metal is widely acknowledged as a safe-haven asset, drawing investors during periods of economic uncertainty or geopolitical turmoil. When riskier assets such as equities become volatile, investors often turn to gold for refuge, leading to an increase in its price.
Moreover, gold has sustained its value over centuries, positioning it as a suitable asset for long-term wealth preservation. While its price may fluctuate in the short term, the enduring value of gold can help protect your portfolio against long-term market cycles.
Including gold in your investment portfolio can be accomplished through diverse methods, including acquiring physical gold, investing in gold exchange-traded funds (ETFs) or mutual funds, or purchasing gold bullion and ingots. The optimal allocation of gold to your portfolio hinges on your individual risk tolerance, investment objectives, and overall asset mix.
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Business NewsMoneyPersonal FinanceGiven the rising gold prices, should you still include it in your investment portfolio?
First Published:28 Nov 2023, 01:01 PM IST
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