Photo: iStock
Photo: iStock

Opinion | Gold redeems itself as a true crisis hedge

Long seen as a lousy investment for offering neither dividends nor interest, the metal has soared while stocks and bonds suffer. It is often the ideal thing to encash for emergency funds

Dismissed as an old mode of investment by financial mavens, something for those who know little about the modern world, gold appears to have redeemed itself amid the current stock market carnage. As Covid-19 has thrown trading screens into the red across the world, gold prices have zoomed, with the one-year return on the metal keeping its head over 20%. This, while share indices like the NSE Nifty and BSE Sensex have lost about half their value, and investors can barely look at their asset portfolios without flinching. These are extraordinary times for everyone, and those who may need to raise quick funds for an emergency would be tempted to liquidate their gold holdings, not stocks, nor bonds. Yes, there are moments when fuddy-duddy advice comes good, and this is one of them. For decades, or perhaps ever since John Maynard Keynes snubbed it as a “barbarous metal", gold has been considered unworthy of smart money because it does nothing for the economy and pays neither dividends nor interest (held in raw form). But it has always been a hedge against capital market crashes, and while paper investments are likely to recover at some point after the prevailing crisis is over, that reality has begun to hit home.

The role of gold as an emergency fund in extreme situations like the one we are going through cannot be emphasized enough. With investors everywhere in the world reeling under the Covid-19 pandemic’s impact on economic activity, hot money has been fleeing to safety. For global market operators, that typically means risk-free bonds such as US Treasury bills, and the like. Swarms of people, however, have piled into gold, which explains the sharp incline of its price over the past month or so. When stock markets are doing well, investors tend to forget that their portfolios need to be diversified. Having too large a proportion of stocks, or even risk-bearing bonds, can be dangerous for precisely the reason outlined above. If panic sweeps the world, most paper assets fall in unison. Not that gold is the sole saviour in such circumstances. Fixed deposits at banks, which can be withdrawn with a slight penalty in terms of interest forgone, are also meant for unforeseen expenses.

In general, gold appreciates rather slowly in market value. Over the long arc of history, it has returned less than broad market indices have. But if shorter frames of time are taken for analysis, there have been several gold spikes. All these are points of frozen risk appetite among investors. The jagged appearance of the price line over the past century also shows that, for all the uncertainty of those times, things usually do return to normal. We cannot say how long investors will stay wary of risky assets under the coronavirus scare, but gold will likely lose some of its sparkle as clarity is obtained and fears recede. Well-off Indian households like to buy gold as a calendar event, making purchases on occasions like anniversaries and festivals, and keep adding to their treasure chest. Much of it is held as jewellery, which may have sentimental value as well. Some of these investors may need to examine whether they have too much of the glittery stuff. It is advisable to keep about 5-10% of one’s money in gold. If households have a proportion well in excess of that, they could consider selling some of it while prices reign high. Gold is a store of value. Make the most of it.

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