Is Gold A Safe Investment?

Gold rates have been rising steadily over the past several years. The year 2023 saw the rate of 24 karat gold breach the ₹60,000/- mark, reaching an all-time high of ₹ 62,400/- on May 05, 2023. Gold rates today are more than double that of five years ago, growing at a steady rate of 15% per year.

Many people see gold as a relatively stable investment. It is estimated that investments account for 20% of the physical gold available in the world today. These are held in the form of gold bars or gold coins or in digital forms such as Digital Gold, Gold Mutual Funds and Gold Exchange Traded funds. Many investors see diversifying into gold and gold-related investment products an ideal hedge against inflation and volatility.

This article therefore looks at the reason for this trend. It also attempts to help investors understand the intrinsic value of the metal and decide for themselves how stable it is as an investment.

Throughout the history of humankind, gold has always been a commodity valued over all else. Almost every different culture that evolved independently used gold as a symbol of power and accomplishment. Almost every civilisation used it as a currency or medium of exchange. Gold is one of the noble metals – the others being rhodium, iridium, platinum, palladium, osmium, ruthenium and silver. These metals stand apart because they barely react with other elements on earth, therefore making it easy to retain purity.

With the exception of silver and gold, the others are extremely rare and difficult to extract. But because silver has the tendency to tarnish, gold attracted a higher value and became the most popular and stable medium of exchange. In fact, even while paper currency took over as a medium of exchange in the last century, gold still served as a backing for paper currency in Central Banks till the 1970s.

Much like other commodities, one of the foremost factors affecting the rate of gold, is demand and supply. Gold has a high intrinsic value. Part of the reason for this intrinsic value is its extreme malleability – one ounce of gold can be stretched to a wire of 50 miles! This along with its glittering lustre makes it in great demand for making jewellery. About 50% of all gold mined is converted into jewellery.

Apart from jewellery, gold has several other uses. Gold is in great demand in industry – the most important industrial use being the manufacture of electronic equipment. It is an excellent conductor of heat and electricity. It is therefore used in the manufacture of circuits for several electronic items from radios to computers. While many of us are aware that gold is used in dentistry, few are aware that gold is also used to treat medical conditions such as cancer as well.

Another factor adding to the attractiveness of gold as an investment is that it is far more liquid as compared to real estate - it is far easier to dispose. It is also easy to get a gold loan in India against this asset. While earlier one had to go to a jeweller or pawn broker for a gold loan, today, both banks and non-banking financial companies (NBFCs) also provide gold loans in India today. Many NBFCs offer a doorstep service as well for gold loans. Representatives are sent to the customers doorstep to evaluate the gold against which a gold loan is sought and the quantum of loan that could be availed against it.

Amidst the budget speech of Finance Minister Nirmala Sitaharaman, price of gold future contracts for February 2023 started rising, climbing steadily all through her speech. This was attributed to the increase in the import duty of silver Dore, bars and articles proposed by the budget.

Gold rates in India also depend on the price movement in international markets. As an investment it is considered to be far less volatile as compared to the dollar and oil. Since 2008 especially, investment in gold has been a risk management strategy for many investors, including institutional investors.

But despite it being considered a relatively stable investment, gold rates have also shown some wild swings in different periods. Between 1979 and 1982, gold prices dropped by more than half. Between 2011 and 2015, gold prices declined by over 45%, before climbing back once again. While it is often seen as a good diversification strategy, like most investments, investment in physical gold has its own share of risks, especially in the short term.