Updated Mar 24, 2022
Why gold is called a safe investment?
Why gold is called a safe investment?
Gold, the yellow metal, has been respected throughout the world since time immemorial. Its rich and culturally woven history has made it a universally acceptable form of payment. In the modern era, it is considered a ‘safe haven’ for investors because it has always commanded good value in the market. Moreover, gold is relatively stable, while other investment options like real estate and cryptocurrency are risky.
What is a safe haven investment?
A safe haven is an investment type expected to thrive during market turbulence. During a long-term economic recession, the market is in turmoil, and the value of most assets falls steeply. However, safe-haven assets like gold are uncorrelated or negatively correlated to the general market. In other words, safe havens either retain or increase their value during times of distress.
Gold as a safe haven
Since one cannot print gold like money, the government’s interest rates do not impact its value. In addition, gold has historically maintained its value and become a safety net for investors. The following are the reasons why investors flock to gold in economic adversities:
- Protection against inflation risks
The inflation rate determines the value of an asset over time. In a developing economy like India, a cash investment will depreciate in value. On the other hand, gold acts as a cushion because its price increases with the cost of living. Investors have witnessed gold outperform inflation rates during high inflation years. When fiat currency loses its purchasing power, gold prices soar. Therefore, people tend to buy gold when the currency is depreciating.
- Ease of buying and selling in the market
Investors need not worry about liquidating their assets as gold is always in demand. They can get immediate cash after selling gold to local traders or jewellers. Moreover, it is possible to pledge gold for a loan from numerous financial institutions. During deflation times, people hoard cash, and gold is the safest way to do it.
- Increasing demand but supply constraints
Gold is intertwined in merging market economies like India. Being the second-largest gold consuming nation, it witnesses a high demand for this precious metal every year, especially during the wedding season.
Simultaneously, there has been a decline in gold production over the last decade. But as the general rule dictates, a reduction in gold prices only increases its value.
- Stability in prices
Gold prices remain relatively stable as compared to other investment options. Prices do not deflate by a huge margin but increase as people turn to gold during a crisis. Alternatives like equity are risky as the price of a stock can reach zero. But gold holds its value and is always a preferred choice of investors.
- Value does not deteriorate with time
It is largely due to its composition that gold has permanency. Its lustre is retained, and its radiance does not fade with age. As such, old ornaments also sell for the same price as new ones. For this reason, prefer buying physical gold and consider it a safe investment.
How to invest in gold?
Traditionally, people invest in gold by buying gold coins, jewellery, bullions, or artefacts. However, new methods have sprung up that guarantee more liquidity.
- Gold Exchange Traded Funds (ETFs)
Investors require a Demat account to buy a proportionate value of gold, although not in physical form. Additionally, asset management and brokerage fees are also necessary. It is important to note that fluctuations in gold prices also affect EFTs. Hence, experienced investors with time and the required skillset are best suited for gold ETFs.
- Gold funds
Gold funds consist of investments made in bullions and stocks of companies that participate in gold mining and related activities. Changes in gold prices do not directly affect gold funds, but market conditions do to some extent.
Contrary to ETFs, a Demat account is not necessary as a mutual fund manager oversees the process and charges a minimal fee. Investors willing to take calculated risks should consider gold funds as they guarantee high returns.
Conclusion
Gold commands respect in the market due to its stability and universally recognised value. Investing in gold is safe as its prices are not much affected in economic crisis. Moreover, it withstands extreme inflation and deflation of the market. Therefore, gold is a safe and profitable way to diversify your portfolio.
