While building their portfolio, investors are always looking for the right assets that can enhance and optimise it with safe, long-term returns.
Today, an investor has a plethora of options from which to choose: stocks, mutual funds, fixed deposits, sovereign bonds, gold - both physical and digital, to name a few. Investors are on the lookout for assets that not only diversify their portfolio but also provide them a financial cushion against unforeseen circumstances, such as the COVID-19 pandemic, which could result in economic instability.
Gold has historically been a good portfolio diversifier, embraced by individual investors and even for institutions. Gold is uncorrelated with the market, therefore it performs better than other assets during an economic slump. One can invest in either physical or digital gold. However, investing in gold in the physical form has always come with added issues such as storage costs, security challenges, and purity concerns, liquidity, among others. This is why many investors are now turning to digital platforms that offer gold as an investment at the ongoing market price but without the hassles of storage or security. In fact, some of these platforms offer lower pricing than published jeweller gold prices in India.
The COVID-19 pandemic has impacted lives and businesses in an unprecedented manner. However, there is one thing that did not come as a surprise to financial experts – despite the economic uncertainty, the prices of gold globally witnessed a steep rise. This makes it the perfect hedge against inflation.
Digital Gold is an asset class with minimum hassles. Let us look at some of the reasons why Digital Gold should be a key part of your portfolio this financial year. Compared to physical gold, the purchaser of digital gold need not venture to a merchant to make the purchase. Given the current situation, it is difficult and dangerous for individuals to venture out unless truly necessary and many shops indeed are closed. Digital gold also removes questions of quality. While a shop’s inventory may be sourced from a variety of places, including resales from the public, digital gold is verified to be of the highest quality. Once purchased, physical gold must be transported home or to a bank vault remaining at risk to theft or natural disaster. Digital gold is stored outside the banking system in fully insured vaults to protect owners against these risks.
Gold jewellery possesses the same risks and furthermore, may be difficult to sell if funds are needed. Digital gold can be bought or sold at any time. Once we return to normal and trips to shops become possible and safe, digital gold will always be more convenient – literally at your fingertips. This saves the investor time, the most precious of life’s commodities.
Digital gold also maintains advantages over financial instruments related to gold. For example, ETFs are managed by a company that can encounter its own financial distress, and in such cases, adversely affect investors. ETFs are pooled investments that use swaps and futures to generate returns similar to gold returns, but invariably there is not enough actually gold to repay all investors if they were to collectively leave the fund. Unlike digital gold which can be gifted right from your mobile device, sending an ETF as a wedding present remains impractical. Sovereign gold bonds are good alternatives to access gold returns, but again, they are not investments in allocated gold. A main drawback of sovereign bonds is that redeeming them prior to maturity can be very costly, making it hard to access funds for as long as five to seven years. Digital gold is fully allocated ownership that is always available should the investor require.
Hedge against Inflation
Gold has managed to do well over time as a store of value. Inflation can erode the value of a rupee or dollar and reduce purchasing power, but gold, even in its digital form, provides a protection against inflation in the long run. Gold is limited in supply and has intrinsic value in various cultures, and has historically, been known to perform well during high inflationary periods.
It is important to note that the price of gold and dollar share an inverse relationship. They move in the opposite direction, so if the greenback increases in value against other currencies, gold becomes cheaper to purchase. When inflation hits the economy, gold retains a better value than other currency-backed assets, making it a safe haven for investors.
Current and Historical Prices of Gold
When one is investing in any financial asset, it is important to see how it has been performing historically. If you look at the prices of gold, you will find that the prices shot up in the 2000s. Further, in 2008, due to the economic crisis, demand for gold by investors increased, taking the price of gold even higher. Recently, as the pandemic took hold, gold prices rose dramatically in the first half of 2020. Traditionally, the price of gold has appreciated vis-à-vis the US dollar. In the last 50 years, the value of dollar has dropped at a rate of over 8 % annually relative to gold and the Indian rupee has devalued by over 11% per annum over the same period.
Gold will reward you in capital gains. The mining of gold has been declining over the years, so the pricing of the yellow metal follows the supply-demand rule. As per the World Gold Council, it is estimated that around 200,000 metric tonnes of gold have been mined throughout history, out of which two-thirds alone has been mined since 1950. Furthermore, the US Geological Society estimates that only 50,000 metric tonnes of gold are left to mine. Considering that gold is essentially indestructible, it is still present in the world in some form or the other. Further, unlike other metals, gold is not used for industrial purposes. Therefore, its value is not correlated to the economic cycles as is true for other commodities.
Asset Diversity in the Portfolios
To safeguard their money against market volatility, investors can consider digital gold in their portfolio for this financial year, to spread out risk and capture potential upset due to market uncertainty. Despite the ongoing pandemic, the price of gold has risen. Besides, gold usually moves in the opposite direction to the stock market. Allocating about 5 percent of your portfolio to digital gold provides insurance against any type of market risks.
While building a portfolio, investors should not only look at assets that will increase their wealth but will also protect their wealth against inflation. Digital Gold will provide you both the benefits.
Gold in India holds an aspirational and familial value. It has been the asset of choice for ages and has been passed on in families from one generation to the next. As an investor, if you are keen to invest in gold but have avoided the inconvenience of purchasing physical gold or are unable to bear the high cost of investment such as storage and security costs, you can invest in digital gold this financial year. In addition to the benefits discussed earlier, digital gold allows investors to invest in small amounts.
Therefore, anyone can start investing in this precious metal. Digital gold is easily accessible, and you do not have to bear any other costs except for the gold you are investing in. Right from storage to insurance, all costs are borne by the provider. That said, an investor should invest in an asset based on their investment goals and risk appetite and consult a financial advisor to identify the ideal portfolio for them.
The author, Ashraf Rizvi, is Founder and CEO at Digital Swiss Gold and Gilded. The views expressed are personal