Gold has been an age-old favourite among Indians. However, some simply buy it because it is a part of tradition without a clear reason to invest in the metal.
Before we get into the reasons to buy gold, it is important to understand the difference between investment and purchase.
One purchases something because they want to own it, use it or that it holds sentimental value. For example, you would buy a gold ring or any other jewellery for wedding purposes or as a gift to a loved one. It is highly unlikely that you would sell such kind of possessions to make a profit.
As for investment, you can make a purchase as it will serve as an asset that you can make a profit on in the future or use it to pay for an emergency or to make a goal-oriented purchase. For example, you invest in mutual funds to purchase a car from the corpus that you accumulate.
Similarly, this article will talk about the reasons to invest and not buy gold.
What are the reasons to invest in gold?
1. Hedge Investment
When one decides to start investing their earnings, it is always wise to diversify the assets they hold, that is, not hold all their eggs in the same basket. This means that it is good to invest in more than one asset category, like mutual funds, equities, gold, etc.
Globally, gold is considered as a hedge investment, which means that money is bet on gold so as to offset any losses in other asset classes.
For example, if you have placed some funds in equity and faced losses, it could be offset by your gains in the metal.
Gold generally moves against the markets as traders take their money out of equity and place it on the yellow metal during times of uncertainties.
In the month of August and September, we saw that gold made tremendous gains as fear of recession hit investors around the world amid growing trade tensions between the US and China. At the same time, the markets weren't doing well.
During this time, gold price in India hit a new high of Rs 39,885 per 10 grams, giving dramatic profits for those who held on to the metal.
2. Hedging Against Inflation
Gold forms an important part of Indian weddings. If one makes systematic purchases of the metal over the years for their child's wedding, it will help them save in the long-run as the cost of living keeps increasing.
Almost all currencies, depreciate in value in comparison to gold. By holding some amount of your earnings in gold, your savings will be more valuable than being simply kept in a savings deposit account.
3. No Lock-in Period
If you invest in a fixed deposit or provident fund, you have to stick to the investment till the tenure is complete in order to receive the promised returns or at least not lose any amount on making premature withdrawals to penalties.
In comparison, gold is highly liquid and can be easily sold as and when you need cash. This proves handy in case of emergencies.
4. Safe Haven
In an extreme crisis, especially at a national or global scale, gold becomes the most valuable asset. In the past, the economy of some countries have fallen in a state of chaos wherein their national currency's value fell excessive, causing job losses and migration.
In such a state, your other assets like real-estate will hardly be of any help as almost no one will have the purchasing power to buy it from you. However, gold is a universally accepted and understood form of wealth that could be your saviour in a crisis.
Any geopolitical uncertainty is also a time when gold gains in value.