Gold Investment: Role of Gold in Investment Portfolio

All Indians together have more gold than the gold reserves of countries like Singapore, Sweden, Australia, Kuwait, Denmark, and Finland. Does this sound like a fact or a myth? It’s a fact. 

While India stands at the 122^nd position based on per capita income out of a list of 189 countries, it is one of the top ten countries to own the world’s gold. As per the World Gold Council, Indian households have more than 25,000 tonnes of gold.

These startling facts highlight the unanimous popularity of gold in Indian households despite the cultural, geographical, social and economic diversity in the country. Even in rural India, every good harvest season is likely to witness a spike in the sale of gold in the market. 

Why is gold so popular in India?

More than an investment avenue, buying gold among Indians has evolved as a cultural norm and gold is traditionally passed down from one generation to another. It has also been seen, historically, as a form of informal insurance. Through the ups and downs of the country’s political and economical environments, households have found a sense of security in gold, owing to its universal liquidity, when times are tough. 

Given that legacy, it is safe to say that gold is part of the portfolio of Indian households. But before we dive into whether you should also further include it in your investment portfolio, let’s explore the difference between physical gold and digital gold.

Physical gold vs digital gold

Although the prices of physical and digital gold move in tandem, the overheads involved are vastly different. For instance, investment in the form of gold jewellery (22 carats), coins, bars, etc. is referred to as an investment in physical gold. It comes with overheads such as storage cost, making charges of jewellers (which may vary in the range of 8.5% to 35%), among others.

Most of the time, these constraints are referred to as hidden costs because the same is not actively deliberated at the time of purchase. They reduce the effective returns from the investment. For instance, if you bought a gold necklace for Rs 2 lakhs, at the time of selling, you aren’t going to get the same value back because during the exchange, the purity of gold, standard deductions from the value of gold sold, among other things, are applied. 

Hence, from a strictly investment point of view, digital gold makes more sense as it protects you from all these hidden costs. Digital gold includes gold ETFs, gold mutual funds, gold bonds, and other gold-linked financial products in the market.

The role of gold in your portfolio 

The gold asset class is counter-cyclical to the market. Currently, as also seen during the global financial crisis in 2008, gold prices are already at a multi-year high given the uncertainty about the future. Hence, gold is a perfect hedge option. Since this asset class is not impacted in the same ways by the same things that the stock market is, it’s prudent to have some gold investment in your portfolio. 

However, the tricky part comes here. The returns on gold have proved to be erratic over the years. As per the 2019 year-end analysis by Money Today, gold delivered negative returns in three out of the last ten calendar years. This inconsistency makes it difficult for you as an investor to make the right calls since gold did also yield positive returns for seven out of ten years.

So, the important question is when exactly to add gold to your portfolio to get the most out of it? If we consider the current time, the entry cost into this asset class is relatively higher at the moment.

How to make the right call?

The moment you reposition gold from a cultural norm to an asset class in your portfolio, you have to consider these pertinent questions — To what extent should I invest in gold? When is the right time to invest in it? How should I go about the process of investing in gold? 

The investment 101 formula dictates ‘buy low, sell high’ but the execution of the same requires professional inputs. You can, of course, do heavy-duty research, keep track of gold (ETFs, futures, bonds etc) to develop your own investment formula. But if this sounds intimidating, that’s okay. It is, in fact, a very time-consuming and labour-intensive task that almost amounts to a full-time job. 

This is where a solution like Appreciate Wealth comes into play. The AI-driven algorithm of Appreciate Wealth constantly tracks the economy at large and the prices of gold. This metadata analysis helps an investor to maximize their returns on the investment. These trends help to identify sweet spots to make sound portfolio allocations that are aligned with your financial goals. Appreciate provides cutting edge investment tools (like our AI-based algorithm), and helps you navigate the world of investing — be it gold, stocks, bonds or shares. Log on to www.appreciatewealth.com and sign-up today to make prudent investment decisions.