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Gold as an Investment: Why it is the Ultimate Safeguard Against Crisis

With the earliest instance of gold being used as a medium of exchange dating all the way back to 800 BC, this metal has retained its reputation for holding its value across time. Gold is predominantly used as a store of value due to its immunity to factors that impact other asset classes like demand/supply drivers and correlation to other assets.

Interestingly, gold functions in a manner quite similar to flat currencies, with interest rates and growth outlook often determining its performance instead of inventory levels and physical premium. As a result, this commodity has enjoyed a fairly positive historic performance, even during times of crisis.

Gold Offers Investors the Opportunity to Pursue Value Investments

Although gold is a scarce commodity, the global availability of this metal manages to prevent slowing down mainly because of the way investors treat this asset. Rather than investing in the shiny metal for a set period of time and then liquidating their investments, most investors hold on to it indefinitely, knowing that the metal can be used in times of need. Although Gold ETFs, a relatively contemporary way of investing in this commodity, have changed the way investors rely on the metal to grow wealth, most investors in developing nations still use gold as a store of value.

Additionally, as gold is not consumed the way one sees other assets like oil and petroleum, the amount available in the world – though bought and sold at different intervals – remains at a constant. This is another reason why investors perceive it as a highly ‘safe’ investment.

Gold Investments Offer Protection Against Inflation

Aurum, as the ancients called it, has historically proven to be a good hedge against inflation, as its price tends to rise along with the cost of living. Financial experts have witnessed gold not only retain, but also increase in value even as stock markets have crashed around it. This happens mainly because fiat currencies lose most of their purchasing power in times of inflation, which is when experts value gold by basing its price on currency units, ensuring that the cost of acquiring it rises along with inflation.

The commodity also holds its value during a deflation – a period in the economy when prices tend to drop due to excessive debt and economic burden. In fact, even during the Great Depression in the 1930s, experts witnessed the price of gold investments soaring high even as the Dow Jones Industrial Average (DJIA) fell by a quarter of its peak value. This phenomenon is deeply linked to human behavior – in times of a crisis, we tend to hoard money and the value of the metal rises even in dire times.

gold-performance-depression
Source: Seeking Alpha

Consider the current US-Iran conflict and the toll it has taken on the Indian investment market: while Nifty crashed by almost 2%, the price of the yellow metal rose to a whopping ₹ 41,000 per 10 grams, proving that even during a crisis, this metal retains its value and is a fantastic investment. As a result of this, gold is often labeled as a ‘crisis commodity’, making it a favorite amongst investors during times of geopolitical uncertainty and global crisis.

It Has Witnessed a Steady Increase in Demand

Over the years, gold has seen a steady increase in demand, particularly from developing nations like India. In fact, India and China are the top two consumers of gold in the world, with Indians typically flocking to jewelry-based investments (particularly during the wedding season between October and February), and the Chinese preferring gold bars over jewelry. Investors are also now waking up to the fact that commodities are a great investment class to allocate funds into, and this knowledge has translated into more investors seeking gold-based investment options. To understand how gold has surged in popularity over the last decade, keep in mind that the SPDR Gold Trust, a relatively new ETF in the U.S, grew to become the largest Gold ETF in the world a mere 4 years after being offered to investors.

gold-performance-2010-2016
Source: Schroders

One of the foremost reasons why investments in paper gold have grown in popularity is because gold helps investors diversify their portfolio with stunning ease. This is because while striving for diversity in one’s portfolio, one must ensure that investments are spaced out over a range of assets that are not linked with each other so that in the event that one happens to underperform, your other investments are still safe. As the performance does not rely on any other commodity, and often sees an inverse relationship with the equities market, investing in the same can be a great way to ensure you’re not placing all your eggs in one basket.

Gold as an Investment – the Right Way to Shine!

Novice investors, particularly those in India, often equate gold investments with buying physical gold. However, while jewelry is one of the most common ways to invest, it isn’t always the most practical. This is because investors must also pay making charges that range from 6-14% of the cost of the metal (and can even go as high as 25% if investors want contemporary designs).

These costs are generally irrecoverable, which means that you start your investment journey with a slight deficit in your account from word go. Investing in paper gold, on the other hand, is not only a more profitable option but also a more convenient one.

ETFs are arguably one of the best ways to invest in gold as they eliminate the high costs associated with buying jewelry or gold coins. Known for being cheaper than mutual funds, ETFs make it far easier for young investors to invest in gold. You can also expect greater transparency in pricing, with the investment units mimicking the actual market price of gold.

Gold ETFs offer the following benefits:

  • These ETFs are typically more cost-effective than buying physical gold as one does not have to worry about additional costs like making charges.
  • These ETFs are traded on an exchange, which means that they are incredibly liquid.
  • Investors do not need to hold physical gold in order to grow their wealth, which makes this form of investment incredibly convenient.
  • These ETFs do not come with value-added or wealth taxes, helping investors save more money.
  • You can find ETFs that align perfectly with your risk appetite and enjoy ROIs based on the same. This makes this form of investment ideal for all types of investors.
Summing Up

When picking the right ETF for your needs, you must consider a few factors such as the level of assets, trading activity, the underlying assets, market position and tracking error. Additionally, you must also consider your risk appetite and investment goals in order to ascertain whether certain ETFs are appropriate for you as an individual. This can be quite daunting for novice investors, which is why it makes the most sense to get in touch with our professional financial advisors at Kristal AI.
Backed by AI-enabled recommendations and years of experience in the field, our advisors can accurately narrow down a selection of gold ETFs that suit your needs and help you meet your investment goals with ease. For the Indian investor, we now have an offering of Pure Gold ETF | GoldBees which allows you to invest in physical gold and gold-related securities.

Disclaimer

This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.

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Gold ETF Gold investments

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