A good portfolio contains well-diversified investments that generate maximum returns with the least risk. Gold investment is one of the most popular ways of diversifying the portfolio. Gold Is the most beneficial investment haven in various countries compared to other precious metals. Gold was used as a currency for many centuries until the financial crisis of world war. Like most commodities, the prices of gold are driven by supply and demand.
Why invest in gold?
Gold as an investment has been around for ages. Traditionally people purchased gold in its physical form, but in the present generation, gold can be bought in various forms like digital gold, gold funds, bonds, ETF’s. Usually, when there is a crisis, the inflation rate increases that is the buying power of money reduced. This results in an increase in the value of gold. Hence gold works as a great hedge against the currency. Gold investment is also one of the most excellent tools to achieve diversity in the portfolio.
Gold vs. Equity returns
Gold and equity are always inversely proportional. However, in the long run, equity always performs better than gold with very high volatility. So gold is a great tool to use as a hedge. During a financial crisis when the fixed income and the equity markets tank, everyone starts to invest in gold resulting in the pumping of gold prices. But in the long term, you want your money to work for you, and gold investment is only suitable for keeping up with inflation, i.e., 6-7%, whereas, in equity, you can expect a return of more than 12%. When you invest in equity, you now own a part of the company and get extra benefits like dividends. Still, in gold investment, you lend your money, and you will be paid interest on the investment.
How much of your portfolio must be invested in gold?
How much should you invest in gold? This is a highly personal question that will differ from one person to the next. The answer to this question lies in your long-term goals, risk appetite, current financial condition, and current portfolio composition. One approach which can be taken for gold Investment is the amount of confidence that you have in the economy. If you think that the economy will boom then, the gold investment must be 2-5% of your entire portfolio, but if you are not sure about the boom in the economy and want to be a safe investor, then ideally, 20-25% of your portfolio must be invested in gold.
To sum it all up, gold investment should not be considered long-term. The percentage of your portfolio invested in gold also depends on your risk appetite, financial conditions, and long-term goals.