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Why Gold is a Safe Investment Tool in an Economic Crisis

Why Gold is a Safe Investment Tool in an Economic Crisis

Gold has always been a key investment option for many across the world. However, when do investors look at gold and why? The yellow metal has often been seen as the go-to option whenever there’s been recessionary tendencies. In the wake of the covid-19 pandemic too, gold prices have seen an uptick, as the world is witnessing an economic downturn. In an unprecedented time such as this, gold prices have shot up in India.

Historically too, gold picks up whenever there’s a downturn. Take the financial crisis of 2008, for instance. Gold outperformed most other asset classes and fetched returns of 6 per cent when equities fell by a whopping 60 per cent during that time in India. Gold prices and the stock market tend to have an inverse relationship with each other. Whenever the stock markets take a downturn or collapse, gold rises in demand, and more investors look for it.

More recently, even during the US-China trade war that began in 2018, gold prices again saw an uptick in 2019. The uncertainty in trade negotiations and the US presidential campaign were seen as some of the reasons.

According to the World Gold Council’s (WGC) report released in mid-May (1), gold has gone up by more than 12 per cent in the world market thus far in 2020. Countries across the world, including India, announced economic stimulus packages, and gold has seen to benefit from such steps, the report noted. The WGC report also forecast that if there’s an emerging markets slump, gold’s results this year and next will be higher, and will stay in the positive range even two years from now. However, if the world slips into a much greater recession, this year’s good performance may be followed by a dip in 2023 and turning negative in 2024. Depending on the recovery speed and how the global scenario unfolds the five-year return on gold investments could vary greatly.

How has gold performed in recent times?

In India, gold has always been seen as a hedge investment. Investors are known to hold on to gold as it is seen as an investment mechanism that offers protection from inflation. When the currency value drops during an inflationary period, investors hold tightly to gold. Gold prices also provide the much-needed cushion for investors whenever there is an increased volatility in the market.  In addition, when the value of the rupee depreciates against the US dollar, Indian investors stand to gain in overall returns in gold investments.

In 2019, India saw gold prices jumping nearly 25 per cent on the MCX, the Multi-Commodity Exchange of India. In mid May of 2020, gold touched a high of a little over Rs 47,900 for 10 grams on the MCX, and at that point gold price had seen a 16 per cent rally thus far in 2020. This happened on the back of the covid-19-related uncertainty, and fears over the US-China tensions. However, more recently, on June 5, gold prices saw a drop. On the MCX, gold futures shed over 2 per cent or nearly Rs 1,000 or 10 gram in one day. The reason was that economies globally have been reopening and unemployment rates in the US have been falling. In May, US unemployment dipped a little to 13.3 percent as 2.5 million jobs were added.

(Source: economictimes.com*)

What should an investor look for?

The growth forecasts for the Indian economy have been around 3% for FY2020 and about 6.5% for FY21. However, these numbers are subject to revision. If you are an investor, you may be looking closely at the developments. Since gold is always seen as being in an inverse equation with equities, you may also be watching your gold investment carefully.

In terms of average returns, gold has delivered 14.10 per cent every year, for the past 47 years, according to the WGC’s India report in March 20202. Meanwhile, the rupee has seen depreciation this year, which can turn out to be good for gold prices.

If you are an individual investor, you have many options to invest in gold. You could opt for gold ETFs (exchange traded funds) or GSBs (gold sovereign bonds). There is also physical and digital gold buying as options. However, it helps to remember that any investment should be seen as a long-term goal, and gold would be part of your portfolio as a hedge option and to offer stability from volatile markets.

In a nutshell

Gold has traditionally been seen as a good investment option to have in your portfolio, as it provides that much-needed stability in a volatile market. It has historically been observed that gold shines every time there has been an economic downturn, from the global financial crisis of 2008 to the recent times when there has been a trade war between the US and China, to today, when there’s a covid-19 pandemic-related economic downturn. If you are an individual investor, it’s time to explore Tata Capital for a range of wealth management and investment opportunities, apart from advisories and expert guidance to grow your wealth.

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