Why Invest in Gold?
Since the earliest discoveries of gold thousands of years ago, the precious metal has played a prominent role in every part of human culture. The element symbol for gold is Au, originated from the old Latin name for gold, aurum. It is extremely ductile and malleable. A single ounce of gold (circa 28 grams) can be hammered into a 300 square feet metal sheet. It can also form a 8 kilometres long gold thread. Early civilizations linked it to Gods and royal families due to its permanence and immortality. The shiny yellow nuggets with extreme malleability and resistance to corrode signify power, wealth and prominence. There has been a long-standing debate on whether gold is a good investment. Here are the 4 key reasons why you should invest in gold today.
Investing in gold serves as an effective hedge against inflation. For thousands of years, it serves as a medium to store value and preserve wealth. Historically, the value of paper currencies was backed by gold under the gold standard. It’s a monetary system where the value of a country’s currency is determined based on a fixed quantity of gold.
Most nations replaced gold standard with fiat currency as their monetary system in 20th century. The world perceives fiat currency as a more efficient economic policy in maintaining the stability of the economy. The reason being the central banks would have greater flexibility and control over money supply circulating in the economy.
Fiat currency refers to a currency that is declared to be legal tender by a government and not backed by any commodity like gold. Therefore the stability of its value is largely based on public faith and the strength of the government. Fiat currencies tend to lose value over time due to inflation. This is because central banks generally set a target inflation rate as monetary policy to ensure stability of the economy.
As a result, the purchasing power of the currencies holders diminishes over time. Gold prices generally appreciate in a rising inflation environment. Historically, its prices surged in a high-inflation economy thereby make it an excellent hedge against inflation.
Safe Haven Investment
Many investors perceive gold as a safe haven to limit their exposure in the event of any catastrophe. The most recent notable example was the stock market crash during 2007-2009 period. Gold prices soared to a record high of almost $1900 in 2011 due to rising fear of US economic collapse during such times.
Moreover, investors generally flee to gold investment as safe haven in times of rising geopolitical uncertainties. The most apparent events in recent years include North Korea’s nuclear test, territorial disputes in the South China Sea, US-China trade war, the heightened tension between US and Iran, etc. The increasing volatility due to world tensions dampens the investors’ sentiment in recent years.
Consequently, prices of the precious metal tend to rise whenever there’s breaking news that signal intensifying geopolitical tensions.
The lesser correlation between two asset classes, the more effective it is in applying diversification in an investment portfolio. Gold has negative correlation with traditional investments like stocks and bonds, thereby make it an excellent choice for portfolio diversification. Savvy investors generally use diversification to lower the overall risk of an investment portfolio while maximizing its risk-adjusted returns.
Supply and Demand
Currently China and India are the two nations in the world with the highest demand for gold. It plays a dominant role in the jewellery market and accounts for more than half of the yearly production.
Many people see gold as a symbol of wealth and status. Besides, it also plays a prominent role in both countries’ culture. The community uses gold as gifts for special occasions such as weddings or even for ritual purposes.
According to World Gold Council, approximately 190,040 tonnes of gold were mined throughout the history based on its best estimate. There are about 54,000 tonnes ground reserves available for mining as of end of 2017. There is an observable increasing demand over the years particularly due to expansionary economies in China and India.
Besides, there’s an influx of gold investors in recent times due to increasing risk of global economy crisis. Many investors are in anticipation of a major correction in the prevailing longest bull market ever for equity market. The finite supply of the precious metal undoubtedly will give rise to positive impact on the prices in years to come.
It’s an indisputable fact that gold serves as a great investment portfolio diversifier. No doubt gold prices are typically volatile in short term and may not generate massive returns.
Nonetheless it improves the overall performance of an investment portfolio in long term. Moreover, investing in gold requires no specialized knowledge and requires only low initial investment in prevailing financial market.
The consensus for optimal allocation for gold as an investment is in the range of 5% – 10% of the total investment portfolio. There are several ways to invest gold in Malaysia such as buying physical gold, investing in gold ETF or through gold investment accounts. All options are easily accessible at your fingertips! You can refer here for a comprehensive guide on how to invest gold in Malaysia.