Why 2021 is a good year to invest in gold

Historically, gold has proven to a good hedge against a weakened currency and inflation and a safe investment in uncertain times. We witnessed the truth of this in 2020, as the pandemic raged globally and the demand for gold soared.

Gold was a leading investment in 2020 against the backdrop of the pandemic. With its resurgence in the form of a second wave, it looks like 2021 is set to bring similar challenges. It’s because of this that gold is such a valuable investment- because it holds its value even in times of economic distress.

Gold fundamentals

Gold has been an age-old investment, and while price fluctuations may be expected in the short run, its relevance has never been a matter of debate. This lies true because gold is in demand both at the individual and at government levels (central banks across the world stock gold as foreign reserves). Today, investors worldwide see gold as an alternative to traditional stocks and bonds as it ensures risk-adjusted returns and portfolio diversification. This is why investing a part of your portfolio in gold is always a good idea.

Gold’s increased relevance

Over the years, investors have started looking at gold as a mainstream asset for a variety of reasons. The global demand for gold has increased by 15% on average since 2001, and in the same period, the price of gold has increased about eleven-fold. Individuals have realised that traditional investments, like stocks and bonds, are not enough to add security to their portfolio. The fact that it is uncorrelated to other assets and is also highly liquid ensures investors that not all their investments will suffer in times of crisis. Gold’s performance last year only increases its relevance and brings it to the forefront as an investment instrument for retail investors.

Gold as a commodity

Gold is an essential component of the commodity index. However, it boasts of attributes that set it apart from other assets, which also reflects in its performance over the long term. Being scarce and yet highly liquid, it is a safe-haven asset that protects your portfolio during hard times. Its supply is geographically diverse, which limits its volatility. Additionally, its use as ornamentation decreases how much it correlates to other assets. With governments trading in gold, the chances of it losing value exponentially is low. This makes it an investment to consider seriously.

Indian scenario

The pandemic saw gold prices rallying across the world, going up to approximately INR 58,000 per 10 grams of 24k gold in India. Although 2021 has been filled with constant price fluctuations, this should not deter individuals from investing in gold this year, and here’s why. The decrease in custom duty announced during the union budget means buyers will be paying 14.07% tax instead of the 16.26% they previously paid. This decrease may have affected the price, but it also makes buying gold more attractive and affordable than in 2020. Additionally, with SEBI becoming the regulator for gold spot exchanges, quality assurance would no longer be a concern for people willing to invest in physical gold. These kinds of changes in the union budget propel gold investments, as more people will look to buy gold as the price drops.

Beating inflation

Gold and commodity returns in rupees as a function of annual inflation*

Gold returns

The last two decades have seen significant economic volatility, whether it be the stock market crash of 2008 or the pandemic last year. Gold and the stock market have generally shared a negative correlation, which is why gold’s prices have almost doubled over the previous decade. Research suggests that gold performs strongly in high inflation scenarios and has also held its own when deflation hits. In extreme economic scenarios such as high inflation and a weakened dollar, gold outperforms many other assets. By investing a small percentage of your portfolio in gold, you can protect your wealth and add security to it.

Low interest rates

Gold as a commodity is highly sensitive to interest rates. In 2020, gold investment demand was boosted by persistently low interest rates and the dollar's fluctuating outlook. This rise in demand is because lower interest rates across the board reduce the opportunity cost of holding gold. This was evident in 2020, when there were record inflows in gold ETFs at a time of ultra-low interest rates, which contributed to an increase in the price of gold.

Long-term investment

Average annual return over the past five and ten years

Avg annual return

Investors tend to view gold as a safe haven in times of economic uncertainty and often sell when the economy stabilises. However, a stable economy that grows holds a positive outcome for gold since demand rises during these times. With individuals obtain a higher disposable income, the demand for gold rises and positively impacts gold prices. This is especially true in India, where gold is not just an investment but holds cultural significance as well. Gold's performance is at par with other financial assets, especially when looking at a period of more than ten years. While short-term factors such as interest rates, new monetary policies, and dollar changes cause price fluctuations, gold is a great investment choice for long-term investing.

Liquidity

The global gold market is large and highly liquid; in fact, it is larger than several major financial markets, including bonds and stocks. Since it is a scarce commodity, it will uphold its value. If liquidity is a concern when investing in gold, the modernisation of the market has solved that problem. While physical gold can take a couple of days to liquidate, new-age digital formats of gold such as gold ETFs and gold funds can be liquidated instantly. Considering gold ETFs and gold funds also do not share the purity or storage concerns of physical gold, they are a lucrative investment option this year.

These factors show that gold is a lucrative investment for 2021. While its traditional role as a safe-haven investment still lies true today, it can give investors positive returns even during economic stability and growth. Price fluctuations for any investment are common, but gold has shown unparalleled positive growth over time. Its highly liquid nature and the many formats of its availability make it a lucrative, convenient investment. Detailed analysis shows that by investing 5% to 10% of your portfolio in gold can improve a portfolio's performance, diversify investments, and give risk-adjusted returns. If you are thinking about investing on gold, now is a good time to do it.