Should you invest in gold for wealth creation? Too much money invested in a single asset can hurt if its price falls. It should only form 10-15% of the portfolio as a hedge against uncertainty
Nitin has invested in gold over the past few years. He is very happy with the returns he has earned. He does not have any immediate need for gold and only wants to accumulate wealth. He has found that the price of gold has increased in the past year and wonders if he should continue to invest or book profits from the amount he has already invested. How should he decide?Gold should be seen as one of the many investment options for a household to accumulate wealth. Too much money invested in a single asset can hurt if its price falls. Gold being a commodity, its price tends to move up over time. Since investors do not adjust the price for inflation, they see the increase as positive. Nitin should know that the long-term return from gold might just be equal to the rate of inflation.
However, prices of assets are not always driven by long-term trends. There are shortterm events that can move the price significantly above or below the long-term average. Gold is valued for its ability to substitute for any other asset, including currency. It has merits as a store of value. Therefore, the demand for gold moves up when all other assets, such as equity, debt and currency, are falling.
This is especially true when there is an unexpected crisis in the markets, which leads to worry about the future, and this is the time that investors seek refuge in gold. .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:10px;font-weight:500;line-height:18px;} #sr_widget .sr_desc{margin:0 auto 0;} #sr_widget .sr_desc{color: #024d99;}
Investors looking for twin engines of quality and growth.
Nitin’s high returns from gold in the past few years have primarily come from uncertainties in the markets, following the Covid crisis of 2020-21. The prices will return to normal if they have shot up too much. Nitin should look at an allocation of about 10-15% of his wealth in gold as a hedge against unforeseen events. Investing more than this amount would expose his portfolio to risk, and since he has no need for gold, he would be holding an asset that he is unlikely to need and use. Wealth building should be needbased and diversified. Nitin should desist from building wealth on the basis of a view about future prices.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
