Amid Covid-19 crisis, inflation is surging and eating up the savings of people like a termite. The Reserve Bank of India has already showed its concern on the mounting pressure of inflation as the prices of essentials are shooting up uncontrollably. The bank has projected that retail inflation represented by the consumer price index (CPI) is likely to remain above 5% for the financial year 2021-22 (FY22). The fear of rising inflation, particularly the retail inflation, to unprecedented levels has left investors wondering if they are holding the right asset class to be able to beat the inflation. For them one of the biggest risks of investing is not being able to beat inflation and protect their investment from being consumed by this termite.
There are various asset classes which help an investor to take the inflation head-on and make profits out of their investments. However, it’s gold which is considered as a hedge against inflation. The performance of gold over the long term has been found to deliver higher returns than the rate of inflation.
Let me borrow facts from data which suggest that gold has delighted investors by delivering returns higher than the rate of inflation. “Over the last 30 years, in rupee terms, gold has generated an annualized return of 10%. Over the last decade, the annualized return from gold has been 11%. During the same period, the CPI index has compounded at 6.3%. Hence, it can be stated that over longer periods, gold does act as a hedge against inflation.”
Investment in gold is considered as an investment in safe haven. Even as there are investors who prefer equities to gold in investment matters, the fact remains that gold has been delivering returns in a particular situation when investment in equities (shares) has failed to perform.
For example, a data reveals that in the recent past, from the beginning of calendar year 2018 (CY18) to the end of CY20 (three years), Nifty50 witnessed extremely high volatility and generated a compound annual growth rate (CAGR) of 10%, while gold generated a CAGR of 19% in the same period.
However, despite a performing asset class, gold cannot be described as a non-volatile asset. Experts say that it is important to note that the volatility from gold is much higher than traditional fixed income instruments. Hence, the investment horizon for gold should be at least three years, and ideally it should be treated as a strategic allocation.
Let me discuss the glitters of gold in our own context. Kashmiris have always viewed gold as one of the most valuable commodities and own it mostly to hedge during the times of any crisis. Nothing has threatened our love for gold. Uniquely, mostly we own gold in the form of wearable wealth, like necklaces, bangles or earrings and very less as depreciation-safe bars or ingots. Such a treasury is a symbol of generations of patience, thrift and, of course, risk-averse genes. Our great-great grandparents, who bought gold instead of having a piece of land, knew that if they managed to hang on to the gold, it would stand their offsprings in good stead.
Buying gold jewelry may not be called an investment in the rest of the world, but in our culture, it’s one of the most valuable investments. It has not only brought riches to the people but also rescued them during the times of crisis. For a Kashmiri gold jewelry is the best way to preserve and invest wealth. Kashmiris have always felt that whenever they need money, they can sell their gold to generate cash. This is the way our parents and grandparents have always done it.
In short, gold is a store of value. We only use it when we really need money. We use it as collateral for any medical emergency or other emergency, a wedding, or in construction of a house. Even we sell some gold that we own for the higher education of our kids.
Notably, we typically would not sell gold just because the price is high. If gold makes a new high, we won’t get inclined to sell it, either. Of course, we would be happy if the price goes up. Precisely, I think we’d be best served viewing it as not just a potential money maker but as protection against the rabid inflation.
Amidst fears of mounting inflation, what is the ideal percentage of investment in gold an investor should hold in his portfolio?
As an investor, don’t look at gold only in the perspective of being hedge against inflation. You should not think of gold as part of your investment portfolio because of the fear of mounting inflation. Look at it as a long-term investment product. Whether there is inflation or not, you should include gold in your investment portfolio. Inflation alone is not the lone risk to your investment. There are other catastrophic situations like the Covid-19 crisis where investment in gold proves golden investment. Precisely, gold has proved a gainful wealth insurance instrument during wars, natural disasters and political unrest. You can hold 10 - 20% of your investment portfolio in gold, depending upon your risk appetite.
When is the best time to buy gold?
Gold is as good as money and is used as storage of wealth. The performance of the metal over the past two decades reveals that it has continued to increase in value. Even if, at times, its value has dropped it has always not only regained its price position but also gained more spectacular heights. In lieu of this price attitude of the metal, the right time to buy gold is anytime.
Besides, it only depends on one’s ability to buy and retain gold as an asset. To derive maximum benefit, one can go for the steady accumulation of gold as an asset creation. Don’t wait for prices to come down in order to buy it. In short, we have witnessed greater upward movement of gold prices than the downward movements. So, this also means anytime is a good time to buy gold.
While it is impossible to predict the price of gold accurately, it is certain that prices will continue to rise from where they are currently at. Or we can say, the longer one delays making purchases, the more likely gold is to become even more expensive. Instead of putting your money in something else which is highly risk prone or that relies on the value of a dollar to be worth anything, just go for the yellow metal. Its intrinsic value will surely not only protect you against inflation, but will also guarantee you assured wealth creation. Needless to say that the metal is highly stable and the gold market is always hungry for some good news.
What is the right time to sell gold?
It simply depends upon your needs and I don’t think one sells gold because of its high value. So selling of the gold does not depend upon its price.There must be a purpose to hold gold, like retaining asset value. At the time of need one may need to utilise some of his assets and at that moment one may sell some gold to fulfill his needs. In other words, a high or low price of gold is not a reason for selling gold.
Is it useful to take out a loan by pledging gold?
Gold is a commodity which can link you to the bank to meet your financial requirements. A chain of banks and other financial institutions offer loans against gold at attractive interest rates. Over a period of time the gold loan segment has turned out to be one of the fastest growing businesses in India and more and more people are boarding the bus as they borrow money against their gold jewellery. In other words, gold loans are gaining respect.
Here all you have to do is to pledge your gold with a bank and get a loan up to 75% of the market value of the gold you own. However, the percentage varies from bank to bank. Even repayment of the loan is extremely flexible with an option to pay only interest during the entire term and you can make a bullet payment of the principal amount at the end of the tenure.However, before making your yellow metal to talk, you should evaluate your financial position.
Question yourself on the confidence front. If you are confident of returning the money in time, then explore the gold loan option. Otherwise, default in repayment will result in penalties and chances are you may lose ownership of your commodity.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.