5 Reasons to Invest in Gold No Matter What the Stock Market Is Doing

In turbulent years like 2020, gold may beat stocks, but the S&P 500 has generally outperformed gold over longer holding periods. Staying involved in stocks and committing to a lengthy time horizon is a better option than gold if you’re worried about equities collapsing. However, if you’re looking for a short-term hedge against a bear market, putting a modest portion of your portfolio to gold can provide some relief. The point is that you can only be successful if you invest before panic sets in. When a broad case of investor nervousness has pushed gold to a record high that’s likely to be short-lived, the worst thing you can do is buy gold.

Investing in gold in its physical form could be a pain. You’ll have to deal with delivery logistics as well as metal storage and insurance. Investing in gold equities or gold-related ETFs, real gold, or a mix of the two is far less complicated. The main thing to remember is that the optimum time for investing in gold is when you aren’t hearing about gold prices in the news daily.

5 Reasons to Invest in Gold Regardless of the Stock Market’s Performance

Investing in gold based on a short-term stock forecast is pure speculation. Investing in gold equities or funds, on the other hand, can be a useful inflation hedge and portfolio diversifier. When does it make sense to invest in gold, and why does it have nothing to do with what’s going on in the stock market?

It has been Regarded as Valuable Throughout Human History

According to the World Gold Council, global jewellery demand fell by 29% in the third quarter of 2020 compared to the previous year. The drop is largely due to the pandemic’s economic destruction, as well as the precious metal’s increasing price.

Investing in gold, on the other hand, has been highly prized across cultures for thousands of years. It was considered the flesh of the gods by the Ancient Egyptians. The Incas referred to it as “sun sweat.” Gold jewellery is currently in high demand in emerging economies, particularly China, where it is regularly given as a gift for important events including the Chinese New Year. It’s particularly popular in India, where the wedding season and the Diwali festival sometimes result in a shopping frenzy. The highest pandemic-related reductions occurred in these markets.

The coronavirus will not, however, erase gold’s cultural and historical significance throughout civilization. Even if a worldwide recession dampens jewellery demand in the short term, gold will retain its worth.

The Supply Remains Limited

All of the gold mined throughout human history would fit into a cube measuring just 21 meters, or 69 feet, on each side. This is roughly equivalent to 3.7 Olympic-size swimming pools. Contrary to common opinion, the Earth does, in fact, have plenty of gold. It’s just that mining is extremely tough, and most sources lack sufficient gold to make mining profitable.

Only 0.1 per cent of mine prospects are turned into working mines. Before gold can be extracted, the exploration and development phases can take a decade or more. The worldwide supply of gold is limited due to the complexity of gold mining with existing technology, which keeps prices high.

Its Volatility is Lower than that of Most Other Commodities

Commodities are popular among investors because they have a low correlation with stocks, meaning their prices do not move in lockstep. Many commodities have returns that are inversely proportional to the stock market. Because prices rise when inflation rises, commodities are a typical inflation hedge.

Commodities as a whole are extremely volatile, as uncontrollable variables like weather, natural disasters, and political unrest can cause massive short-term shifts in supply and demand. In the short term, gold prices can be unpredictable as investor mood drives prices up and down, but the metal is one of the most reliable commodities assets.

Gold demand is quite consistent in general. Jewellery, which accounts for half of its consumption, is a consistent source of demand, but it clearly declines during economic downturns. About 40% of demand is driven by central banks and investors, including individuals and exchange-traded funds (ETFs), albeit this rises during downturns. Mining activity does not respond fast to price variations because it is so difficult to identify and develop a gold source, so supply remains stable.

It has a Limited Industrial Application

Gold is used in a variety of fields, including electronics, medicine, and dentistry. However, industrial output accounts for just around 10% of global gold consumption. Investing in gold generally has immunity to an industrial downturn, however it is not immune to a consumer downturn in which spending plummets. Silver, on the other hand, is used for the industry to the tune of more than half of all silver mined worldwide, which is why the white metal is more prone to fluctuate with the stock market.

Interest Rates are Expected to Remain Low for the Foreseeable Future

When interest rates are low, investing in gold makes sense as a safe-haven asset because other safe-haven assets, such as U.S. Treasury bonds, don’t offer much of a return. The Federal Reserve has stated that interest rates will remain around zero until at least 2023. As a result, gold may continue to keep its value for several years. Bonds will make more sense for investors seeking returns that can outpace inflation once interest rates begin to rise again.

Stocks and Bonds vs. Gold. Which is Better?

When assessing the long-term performance of gold as an investment, the time period under consideration is critical. For example, equities have outperformed gold over a 30-year period, while bonds have performed similarly, while gold has outperformed stocks and bonds over a 15-year period.

The price of gold climbed by roughly 360 per cent from 1990 and 2020. The Dow Jones Industrial Average (DJIA) increased by 991 per cent within the same time span.

Instead, the price of gold has climbed by 330 per cent in the 15 years from 2005 to 2020, almost the same as it has in the 30 years. The DJIA only rose by 153 per cent throughout the same time span.

So, stocks appear to beat gold by around 3-to-1 over the long term, but gold may win out over shorter time horizons. Indeed, from the 1920s to the present, equities have blown gold out of the water.

When it comes to bonds, the average annual rate of return on investment-grade corporate bonds from the 1920s to 2020 has been roughly 5%. That means corporate bonds have returned roughly 330 per cent over the last 30 years, somewhat less than gold. Bonds have produced poorer returns than equities and gold during the last 15 years.

Is It Important to Consider Investing in Gold?

The best way to look at an asset class is from the standpoint of its allocation in your portfolio. One of several reasons for assigning assets to various asset categories in your portfolio is that, in an ideal world, asset classes would have a negative correlation, allowing your portfolio to remain balanced. In actuality, there is no such thing as a negative correlation, although a low positive correlation is preferable. 

As a result, your portfolio will be less volatile, as all of your investments will not rise or fall at the same time. The idea for investing in gold is the same: allocate certain funds to it so that your portfolio’s volatility is reduced to that level, i.e., low positive correlation with other assets. The advantage is that risk-adjusted returns, or returns adjusted for volatility, will be significantly higher. 

Gold allocation in your portfolio should be based on your profile, investment objectives, and investment horizon, but it should be kept to a minimum and should not make up a significant portion of your portfolio. The most frequent asset classifications are equity and debt; equity is designed for long-term wealth production as well as economic expansion; debt is designed for short-term wealth generation and relatively stable returns. If you consider investing in gold, you will have less overall volatility than if you simply had stocks and debt.

Why Invest in Gold?

Most risk-averse investors look for three things before investing: safety, liquidity, and rewards. While gold acquits itself admirably in the first two criteria, it also performs admirably in the third. The following are some of the reasons why you should invest in gold:

• Investing in gold is advantageous since it outperforms inflation. The return on gold investment has tracked the rate of inflation through time.
• The price of gold is inversely proportional to the price of stock investments. If the stock market begins to fall, gold, for example, will do well. Including gold as an investment choice in your portfolio will act as a hedge against overall portfolio volatility.

Has Gold Proved to be a Good Long-Term Investment?

Gold is regarded as a secure investment. Because the price of gold does not normally vary with market prices, it is believed to provide a safety net when markets are in a downturn. As a result, it can be regarded as a dangerous investment, as history has proven that gold’s price does not constantly rise, especially when markets are flying. When the market is fearful and stock prices are expected to fall, investors often gravitate to gold.

Furthermore, gold is not an asset that generates income. Unlike stocks and bonds, gold’s return is solely dependent on price appreciation. Furthermore, gold investment has its own set of costs. It necessitates storage and insurance fees because it is a tangible asset. Taking these characteristics into account, gold is best used as part of a diversified portfolio, especially as a hedge against a declining stock market. Let’s take a look at how gold has performed through time.

When is the Best Time to Invest in Gold?

The elements that might help you decide when it’s the perfect moment to invest in gold are:

Timeline of Gold Prices

This stage may need some effort on your part, but keep in mind who is talking about money in the first place. All you have to do is compare gold prices over the last few years and look for patterns, such as when gold prices are lowest through the year, and then make your decision on when to buy in gold.

The Ratio of Gold to Silver

The number of ounces of silver necessary to purchase one ounce of gold is known as the gold to silver ratio. A lower value of this ratio would, logically, result in a lower gold price, and vice versa. When the value of this ratio is low, investing in gold is a good option.

It’s vital to think about the time range for investing, as well as study market research to get a sense of how markets are likely to perform, as with any investment. Investing in gold is not a risk-free investment; like equities and bonds, its price varies based on a variety of global economic conditions. Diversification is crucial in all investment portfolios, and gold may assist in diversifying a portfolio, especially during market downturns when the price of gold tends to rise.

FAQ