All You Need To Know About Gold As An Asset Class

All You Need To Know About Gold As An Asset Class

Gold is a precious rare yellow metal, and among very few metals that hold emotional, cultural and monetary value. Varied people consider gold purchase for various reasons, primarily driven by a range of local, socio-cultural, domestic market and global macro-economic factors.

Generally, Investors always try to diversify their investible surplus to minimise their investment risks. And, globally gold is widely regarded as a safe haven, as it expected to do better when other asset classes are in a slowdown or in case of market slowdown.

However, there are other safe-haven asset classes also available, but gold holds a premium position above all the other safe-haven investments. That’s why it is found that investors often park some money in gold to hedge their portfolios against steep volatility.

Let's understand this yellow metal as a commodity

Like every other commodity, gold prices are heavily impacted by demand and supply forces in a free market, and no government plays any role to control rise and fall in its price. Majority of the world's gold comes from China, Australia and Russia as they are major miners of the gold. Globally majority of gold demand comes from the jewellery market, but aviation sector, medicine and electronics sectors also contribute significantly to gold demand.

Governments and central banks are also purchasers of gold. Currently, the United States is the largest gold hoarder, followed by Germany and the International Monetary Fund (IMF) as well.

Why Private Investors consider gold buying

By large private investors holds a lot of cash, and mere holding cash does not provide them with a risk-adjusted nominal rate of return. They can deploy their cash in real estate, fixed income securities, equities and gold. Many a time they buy gold just to hedge their portfolio against inflation and market slowdown.

When market turns unfavourable, the above-mentioned asset classes do not perform according to expectations leading private investors to buy safe-haven gold to hedge their investment against market risks. So, it makes sense to hold assets that help to offset some of effects of a market downturn.

In the past 40-years, gold has delivered a gargantuan amount of return to the investors. It recorded humongous returns from 1978 to 1980 and from 1999 to 2011.

However, many a time it has struggled, particularly during the 90s because of growing U.S. GDP, interest rate hikes in 1995 amidst a tight fiscal policy in the US. After 2011, the US dollar appreciation and stronger US economy hurt gold investors. The stock market recovered from the financial crisis and turned into an uptrend and investors were not as interested in owning gold as a safe haven.

Different ways of Gold Investing

Physical gold

One simple way to take gold exposure is through buying gold as jewellery, coins or bullion. However, among these three, gold bullion always trades at a premium price against the other two above mentioned. For, holding physical gold, it requires a vault, storage space or bank locker.

Gold futures

Futures contracts are exchange-traded and standardized contracts that trade on recognised exchanges. They allow a holder to buy or sell an underlying asset at a specified time in future and at a price mentioned in the futures contract. To buy gold futures, one needs to open a trading account.

Globally many investors use gold futures as a hedging tool against the volatile commodity market. They can go long or short on the underlying asset depends on their exposure.


Invest in gold ETFs

Gold ETFs are units which represent physical gold. This may be held in dematerialized form or on paper. These units are traded on the exchange resembling a single stock of any company. One can consider buying gold ETFs for varied reasons ranging from investment, social obligations, and redeem gold ETFs to buy physical jewellery in future periods. Advantage of buying Gold ETFs is that the buyer will get the approximate price of one-unit gold which it is further backed up by 0.9995 purity of the metal in case he wants to redeem ETFs later and own physical gold.

Also, it minimises storage costs and avoid chances of theft as in case of carrying physical gold.


Buy gold stocks

Moreover, one can take in exposure in gold through gold stocks. Gold stocks are primary manufactures or exporters of gold, but this comes with an exposure to a company's operational risks. Several times the correlation between the stock price and the gold price could turn negative. But fundamentally strong businesses dealing in the yellow metal could outperform gold returns. However, investment in company's stocks comes with many risks ranging from chances of default, lockout, strike, financial strain, production constraint and many others. Movement in these stocks largely depends upon the movement in gold prices but other internal and external factors also matter in stock investing.



However, time and again it has been proven that in long-run returns from equities have outperformed gold returns. Also, equities provide regular dividend as a percentage of the company’s recorded profit, whereas in gold investing returns can be only harvested through capital gains while incurring insurance and storage costs all along.

But in the past couple of months since US-China trade war and US-Iran tensions escalated further coupled with Brexit,  equity investors have witnessed large swings in the in equity prices  across the globe; now the question arises in the realm of this unpredictability, should we consider gold investing for the purpose of hedging against volatility in the stock markets?

Every investor should allocate some investments in gold in order to hedge their portfolio in the long run, as it has been historically recorded that whenever the equity markets turn rough or volatile, gold price rises. But, in long-run equity will remain the best asset class in order to harvest above-average return against any other asset class available in the market.

At the time of writing (as on October 18, 2019), Gold was quoting at the US $ 1,492.25 per ounce and fell off 6.15 points or 0.41% against the previous closing level. On a Y-o-Y basis, gold has delivered a price return of 18.41%. In the past 52-weeks, it has registered a high of 1,566.2/ounce and a low of 1,225.5/ounce.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

Amidst this, are you getting worried about these falling interest rates and wondering where to put your money?

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