We usually emphasize either on debt or equity when discussing asset types in investment plans. Your financial plan in most cases may include a hybrid of both debts and equities so that you can be the recipient of the advantages that both have to offer.
However, beyond debts and equities, gold has continued to be a part of one’s long – term investment plans, in spite of its limited advantages and market performance. If you are one those wondering, why gold continues to have its place, in spite of the obvious reasons indicating otherwise, we expect you to find your answers here.
The Biggest Question: Should gold be a component of your financial plans?
While including gold in your portfolio, you need to keep in mind that when we discuss gold, we are not referring to the precious metal you will find exclusively in your jewelry.
Gold in terms of investment includes gold in the form of
- Bars,
- Electronic gold,
- And even physical gold in the form of gold bonds.
Simply put, you can make a gold investment with any item that enables you to mimic the set price of gold.
How can gold help in wealth creation?
The goal when discussing the incorporation of gold in a long-term investment strategy is not to emphasize alone on the market’s performance. When it comes to wealth creation and generation via one’s portfolio, diversification is prioritized over improving returns.
While returns are an added advantage, it is the stability and diversity that makes having gold on your portfolio, a wise decision.
However, it also needs to be noted that gold has no intrinsic worth because it neither earns money nor produces profits.
Apart from the diversification, the practice of using gold during times of crisis, is another one of the reasons why it continues to find its place in long – term investment portfolios.
History Repeats Itself – Gold and Its Value During Times of Crisis
Historically gold has seen a rise in its value in times of international crisis. Researchers have pointed out that the price of gold has risen the most during turbulent and unpredictable times, worldwide. Between 1971 and 1979, unrests in the market were caused by economic and political tensions throughout the world.
- Israel was engaged in a number of wars in the Middle East,
- Saudi Arabia had placed an oil embargo on the US,
- Iran was engaged in conflict with Iraq, and Russia had invaded Afghanistan.
- The Gold Standard had also failed.
The next rise in gold – prices came around the time of yet another magnanimous crisis in the 21st century.
Between 2006 and 2011, when the sub-prime crisis, the Lehman catastrophe, and the European debt crisis all coincided, gold had its next phase of rise.
Such instances reiterate on the facts how gold retains its worth, even during times of political and economic unpredictability.
No Correlation to Debts or Equities
The significance of gold originates from the fact that its prices often have a weak relationship with changes in debt and equity. Debt and equity typically follow an irregular structure. When the economy is doing well, bond and equity prices continue to diverge, but during market crises, both of their values plunge.
Since gold’s price has no link to those of stocks and bonds, having gold in your portfolio acts as a natural hedge. Due to gold’s low correlation with other asset classes, even a 5-10% of exposure to gold in your portfolio will provide a natural hedge.
The Presence of a Time – Tested Secondary Market for Gold
This is a fascinating feature of gold. It has traditionally been the asset with a secondary market that has endured the longest. This is due to the fact that gold is a truly global good that just never loses popularity.
The only commodity that is likely exempt from the risk of turnover is gold. You can be sure that there will be a healthy secondary market for gold even in the next thirty years.
How Much of Portfolio should Reflect Gold?
Pankaj Mathpal of Optima Money Managers said, “Gold outperforms debt fund returns over the long term, and if one holds gold for 15 years or longer, they may expect to see at least double-digit increase.”
According to Pankaj Mathpal, if an investor’s risk appetite is low, he or she should maintain a 15% gold exposure, whereas an investor with a high appetite for risk should allocate 10% of their portfolio to gold and the remaining 5% to stocks because stocks typically yield 15% returns after 15 or more years.
Thus, having gold on your portfolio can yield multiple benefits in itself. They bring stable income in times of crisis, they add diversity to your investment portfolio, the rise and fall of equities and bonds do not impact them & can even provide returns when invested upon wisely!