Before the advent of the present-age paper currency, people held their assets in the form of precious metals, like gold. Gold has historically been the most precious metal, and it has been intrinsically linked with social and cultural milieu of all ages. Along with being an indicator of a person’s wealth in historical ages, gold was often passed on to subsequent generations as inheritance. In the modern period, however, investment in gold has lost its sheen because of the advent of better investment avenues, like stocks and securities. But, gold continues to play an important role in portfolio diversification of most investors. It is also an investment, which can beat inflationary trends. In the times of macroeconomic uncertainty and turbulence, investment in gold can provide financial protection.
What is Gold Investment?
Gold is a timeless precious metal, revered for its beauty, richness, and durability over centuries. It has a long-standing history as a valuable asset and a reliable hedge against inflation. The unique characteristics of gold make it an attractive investment. It is a tangible asset available in the form of coins, bars, biscuits, or jewellery, providing physical ownership.
Gold also serves as an excellent diversification tool since its value often moves inversely to the stock market, offering balance to an investment portfolio. Additionally, gold acts as a hedge against inflation, maintaining its value during inflationary periods.
However, unlike some other investments, gold does not generate regular income. This combination of features makes gold a unique and enduring option for investors seeking stability and protection against economic uncertainties.
What is Equity Investment?
Stocks represent a type of security that grants you a share of a company, providing fractional ownership. You essentially invest in that company’s future success by purchasing stocks or equities. The value of your stocks will fluctuate based on market conditions and the company’s performance.
Owning stocks gives you a claim on the company’s profits and assets, allowing for potentially high returns through capital appreciation and dividend payouts. However, the stock market is inherently volatile, meaning stock prices can rise or fall depending on various factors.
Unlike gold, stocks are generally more liquid, allowing them to be easily bought or sold on the stock exchange. This liquidity provides greater flexibility for investors to adjust their portfolios as needed quickly.
Gold investment amidst the Covid-19 crisis:
Because of the outbreak of Coronavirus, gold prices have increased considerably in the last few weeks. According to reports from the Indian Bullion and Jewellers Association Ltd, gold prices peaked at Rs 46,000 for 10 grams (999 purity) in the third week of April 2020. For the first fortnight of April, there was a 7% increase in the prices of gold. During intraday trading at Multi Commodity Exchange of India Limited (MCX), the price for gold futures reached Rs 47,000 for 10 grams on April 16, 2020. Returns from gold investments in April were around 11%.
Equity investment amidst the Covid-19 crisis:
Stock markets across the globe crashed because of the Covid-19 crisis. Indian stock markets fell by around 23% in March. On an average, stock prices fell by around 30%-40%. At present, the market value erosion of Indian equity market stands at 25% as compared to the global figures of around 15%.
Reasons for high demand of gold:
According to industry experts, gold is among the safest asset classes, especially during times of market volatility and crisis. As such, more people are investing either in physical gold or gold-backed Exchange-Traded Funds (ETFs). In the first half of 2024, the assets under management of Gold ETFs increased significantly by approximately 24%, rising from ₹27,778 crore in January 2024 to ₹34,355 crore in June 2024, as per data from the Association of Mutual Funds in India (AMFI). Industry experts believe that stimulus packages by the government could increase liquidity while interest rates would continue to remain low. This could further increase the demand for gold. As per some estimates, the price of gold could rise up to more than 30% in the next 24 months.
Understanding Gold-backed ETFs:
One unit of the ETF in India represents 1 gram of gold. According to the market regulator, Securities Exchange Board of India (SEBI), gold ETFs have prices based on their Net Asset Value (NAV). The prices of trading for these ETFs, however, can be different, based on market dynamics. At present, gold ETFs have a higher premium vis-à-vis their NAV. This is because of the lockdown, which has disrupted the supply of physical gold.
Gold vs Equities: Are Investments in Gold Safer?
| Basis | Gold | Stocks |
| Asset Type | Tangible | Intangible |
| Income Generation | Low, as there are no dividend payouts | High, due to potential for dividends and capital appreciation |
| Volatility | Relatively Low | High |
| Liquidity | Varies (Physical vs. Paper gold) | Generally High |
| Hedge against Inflation | Yes | Unpredictable |
Investments in gold are often considered safer compared to equities due to their lower volatility and historical role as a hedge against inflation. Gold is a tangible asset that retains value during economic downturns, providing stability. However, it does not generate regular income. Stocks, on the other hand, offer higher income potential through dividends and capital gains but come with higher volatility and risk. Stocks are more liquid, allowing for easier buying and selling on exchanges. Thus, while gold provides security and stability, equities offer higher growth potential with greater risk.
Pros of Gold Investment
Gold is often perceived as a safe investment, particularly during financial emergencies or unstable economic conditions. Its value tends to remain stable over time, making it a reliable store of wealth. This characteristic helps investors maintain their purchasing power as gold historically retains its value. Additionally, gold is easy to store, whether at home or in a safe deposit box, providing convenience and security for investors.
Cons of Gold Investment
Despite its advantages, gold has its drawbacks. One of the primary disadvantages is that it does not generate regular income. Unlike stocks, which can provide dividends, gold relies solely on price appreciation for returns, and this appreciation can often be slow.
Storing physical gold can also incur additional costs. Investors might need to pay for safe deposit boxes or insurance to protect their investment, adding to the overall cost of owning gold. Additionally, buying and selling physical gold can involve higher transaction fees compared to trading stocks, making it less cost-effective in some situations.
Pros of Stock Investment
Stocks, on the other hand, offer several advantages that can be particularly attractive to long-term investors. One of the main benefits is the potential for significant returns through capital appreciation as the company grows and becomes more valuable. Stocks can also provide a steady income stream through dividend payouts, which are periodic payments made to shareholders from the company’s profits.
Furthermore, owning stocks grants investors partial ownership of the company, which includes voting rights. This means that stockholders can have a say in important company decisions, potentially influencing the company’s strategic direction and policies.
Cons of Stock Investment
Stocks, while offering potential high returns, come with their own set of risks. Stock prices can be highly volatile and subject to sudden drops due to various factors such as market sentiment, economic changes, or company-specific news. This volatility can lead to significant short-term losses, which can be stressful for investors.
Moreover, a stock investment’s performance is closely tied to the company’s performance. If the company performs poorly or incurs losses, the value of the investor’s stock will likely decrease. This dependency requires investors to conduct thorough research and analysis before investing in stocks to make informed decisions. This level of involvement can be time-consuming and demands a certain level of financial knowledge and expertise.
Understanding Gold-Backed ETFs
One unit of the ETF in India represents 1 gram of gold. According to the market regulator, Securities Exchange Board of India (SEBI), gold ETFs have prices based on their Net Asset Value (NAV). The prices of trading for these ETFs, however, can be different, based on market dynamics. At present, gold ETFs have a higher premium vis-à-vis their NAV. This is because of the lockdown, which has disrupted the supply of physical gold.
Conclusion
Thus, gold can be a viable investment option when the threat of an impending economic crisis is looming large. Along with investment in physical gold, you also have the option to invest in gold-backed ETFs and SGBs. If you want to trade in gold futures at the MCX, always remember to choose a trusted and reliable stock broker which can provide cutting-edge trading platforms along with comprehensive market reports. You can zero in on Angel One, which can help you trade in commodities. Open your Demat Account today.
