Gold Prices Hit All-Time High: Should You Invest?

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The sudden surge in gold prices to Rs.74,000 per 10 grams has caught everyone’s attention. But what’s driving this unexpected jump? And more importantly, should you consider adding gold to your investment portfolio? Is now the right time to invest in gold?

Let’s dive into the factors behind this price surge and weigh the pros and cons of investing in gold.

What’s Behind the Rising Gold Prices?

While many believe that Indian consumers are the main force behind rising gold prices, the reality is more nuanced. According to the World Gold Council, global demand for gold hit a four-year low in 2023. Even in India, gold demand dropped by 3% compared to the previous year.

So, why are gold prices skyrocketing despite lower demand?

i.) Shift from US Securities:

With expectations of decreasing inflation in the US, investors are seeking alternative investment options. Countries like Japan and China, major holders of US debt, are diversifying their portfolios, leading to increased demand for gold.

ii.) Central Banks’ Gold Reserves:

Central banks worldwide, including our RBI, are increasing their gold reserves. China alone saw a 16.1% rise in its gold reserves from 2022 to 2024. This global trend reflects a move away from the US dollar as the primary global reserve currency.

iii.) Gold Production Challenges:

Despite increased mining activities, gold production hasn’t kept pace. Gold Production dropped from 3,300 metric tonnes in 2018-19 to 3,000 metric tonnes in 2023, making gold scarcer and potentially more valuable.

iv.) Dollar’s Influence:

A weaker dollar typically boosts gold prices. Given the dollar’s dominance in the metal market, any decline in its value tends to make gold investments more attractive drive up gold prices.

v.) Inflation Hedge:

Gold is often seen as a hedge against inflation. This perception drives some investors to buy gold investments during times of economic uncertainty.

Gold as an Investment: Weighing the Pros and Cons -Should You Invest in Gold?

Before jumping into the gold market, consider these key points:

1. Is Gold a Safe Haven?

Contrary to popular belief, gold is not always a safe investment. It’s as volatile as equities, meaning its value can fluctuate dramatically. If you’re looking for stable returns akin to a Bank FD, gold might not be your best bet.

In 2012, the price of 1 gram of 24-carat gold stood at ₹3,105. However, by 2015, it had dropped to ₹2,634. Remarkably, it wasn’t until 2018 that gold reached its 2012 price of ₹3,100 again.

During the period from 2012 to 2015, gold saw a decline of 15%. What’s more concerning is that gold didn’t yield any returns for six consecutive years, from 2012 to 2018.

Given these fluctuations and the potential for gold to remain stagnant for extended periods, it’s clear that gold doesn’t fit the bill as a safe investment like fixed deposits.

2. Gold as an Inflation Hedge

While gold can act as an inflation hedge, it doesn’t guarantee returns that outpace inflation. In fact, your returns might fall short of the inflation rate over the long term.

For a deeper understanding of gold’s effectiveness as an inflation hedge, watch:

https://www.youtube.com/watch?v=/90udUR1CYAU

3. Stability of Gold Prices

The notion that gold prices always remain stable is a myth. Although gold has historical value, its price can experience significant fluctuations. A long-term investment approach can help mitigate these fluctuations.

While gold can offer diversification benefits, it’s important to understand the risks involved. Read our in-depth analysis on the potential downsides of Understanding The Risks of Gold Investment! Volatility vs. Stability

4. Gold vs. Stock Market

While both gold and the stock market are subject to fluctuations, let’s examine the difference in their returns over a 15-year period.

If you had invested ₹10,000 every month in gold from January 1, 2009, to December 2023, the total investment of ₹18 lakhs would have grown to ₹39.37 lakhs. This represents a growth rate of 9.77%, which might seem reasonable. However, you have to consider whether this return justifies the risk posed by price fluctuations.

Now, let’s compare this with investing in the Nifty index over the same period. Investing ₹10,000 monthly in Nifty from 2009 to 2023 would have yielded an annual return of 13.98%. As a result, your ₹18 lakh investment would have grown to ₹52.61 lakhs, earning you an additional ₹13 lakhs compared to gold.

But that’s not all. What if you had invested in an active equity mutual fund like HDFC Flexi Cap Mutual Fund during this period? Investing ₹10,000 monthly in this mutual fund from 2009 to 2023 would have resulted in your ₹18 lakh investment growing to ₹69.85 lakhs. This translates to an annual return of 16.43%, earning you a whopping ₹30 lakh more than investing in gold.

So, when considering the risk of price fluctuations, it’s evident that both the Nifty index and active equity mutual funds significantly outperform gold in terms of returns over a 15-year period.

5. Long-Term Gold Investment

While often touted as a safe haven, gold’s historical performance can be bumpy. For example, between 2012 and 2015, gold prices experienced a decline of roughly 15%. Perhaps more concerning for some investors is the extended period of stagnant returns.

From 2012 to 2018, gold essentially yielded no returns for six consecutive years. This highlights the reality that gold isn’t a guaranteed path to riches, and its value can fluctuate significantly even in the long term.

Investing in Gold: Making an Informed Decision

The aim here isn’t to deter you from investing in gold but to offer a balanced view. While gold offers potential benefits, it’s also fraught with risks. Like any investment, it’s crucial to understand these risks and make an informed decision.

So, is gold the right investment for you?

Well, that depends on your investment goals, risk tolerance, and market outlook. Before making any investment, consider consulting a financial advisor to ensure it aligns with your financial strategy. After all, as with any investment, the key is to diversify wisely and stay informed.

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