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The love for gold in our country does not need any mention. Whether it is buying for a daughter’s wedding, investing for returns & safety, or using it as a daily wearable item, gold has always glittered in our minds. Gold is considered as the lender of last resort; it is only in extreme circumstances people mortgage their gold for cash.
From an investment point of view, the performance of gold over the years has been inversely proportional to the performance of other asset classes, notably equity. Whenever equity markets have seen a downturn, people have resorted to buying more gold. This is validated from the fact that in 2019 when all asset classes including equity and real estate gave negative returns, gold was up by 24%. Indian households hold the maximum gold and they turned out to be the best fund managers in 2019.
COVID being one in a century global event has adversely impacted global economies, corporations, and individuals. Most of us want to preserve maximum cash and resort to safety, therefore, there have been increased investments in gold globally.
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Why are Gold Prices Rising During COVID?
Gold prices tend to rise whenever there is economic uncertainty, GDP growth is lacklustre, inflation is expected to rise and there is abundant liquidity. Going forward, world economies will struggle for growth owing to the impact of COVID which will lead to a more monetary stimulus or cut in interest rates to spur growth. Most of the large economies like USA, Germany, Japan, UK, China, and India have recently cut interest rates very sharply which is an indication of the fact that growth will take time to come back. This cut in interest rates could lead to a rise in inflation soon, thereby increasing the demand for gold as a hedge to inflation. Also, equity markets have been volatile leading to investments being directed towards gold.
Should You Buy Gold During COVID?
As part of an asset allocation strategy wherein you diversify your portfolio by buying different asset classes, we recommend buying gold in your portfolios. Global uncertainty and stock market volatility is here to stay, so it would be a good time to add gold. However, one must be careful of not over allocating to gold. At best gold should be not more than 15-20% of your portfolio with the remaining in equity and debt basis your risk profile, age, time horizon and goals. We say so because if we look at the long-term track record, equities have beaten gold handsomely over 10-30 years. While gold has returned about 8% in the last couple of decades, equities have returned about 13% (this is after the recent fall-returns were around 15% till Jan). One can buy gold in a couple of ways, you can read another post of ours to know the best way of investing in gold – How to invest in gold-paper, physical or both?