Why Gen Y, Gen Z shouldn’t shy away from investing in gold

Domestic Gold ETFs have attracted 11.5 lakh new investors and upwards of Rs 2000 crore in flows in 2022 as per AMFI data. Risk aversion as a result of the Russia- Ukraine war, the chaos in stock and bond markets and stubbornly high inflation are re-establishing gold’s relevance in investor portfolios. Most seasoned investors either already have sufficient allocation to gold or are using the recent price correction to augment their exposure. Having seen many economic cycles and market ups and downs over the years, they need no convincing about the wealth enhancing, risk mitigating, stabilizing role of gold in investment portfolios.

Today I’m talking to India’s newest investors- young and savvy 20 and 30 somethings. Hey there!

The numbers show that many of you have started investing in the Covid era and parked your savings in mutual funds and equity assets, which is a great start. With the glorious rally that equities have seen over the last couple of years, coupled with the ease of investing and Fear of Missing Out, this isn’t surprising. But somehow most of you don’t find gold interesting enough. The asset class mostly attracts mature investors and is deemed “inefficient”, “traditional” or “boring” by the younger lot. Maybe because you haven’t been around long enough to witness its many benefits – as a portfolio diversifier, preserver of purchasing power and source of liquidity. Or maybe because you equate gold investing to purchasing pricey and bulky physical gold. Let me try and change your mind about that.

Gold has an inverse relationship with risky assets like stocks and currencies and often negatively correlates with a strong global economy. It has historically been an effective portfolio diversification tool in times of economic, health or geopolitical crises, limiting downside risks when equities collapsed.

If we recap, in the calendar year 2001, domestic equities corrected by 18%, while gold gave positive returns of 6%. In 2008, during the global financial crisis, equities fell 52%, while gold was positive 26%. In 2011, the Sensex was down by 24% and gold gave a return of 32%. In 2016, gold gave 11% returns while equities gave a meagre 3%. In the recent past, from 2018 to 2020, equity markets witnessed extremely high volatility amid the US China Trade wars, the pandemic and its economic repercussions and generated an average return of 11%, while gold gave an average return of 17% in the same period.

Coming to gold’s utility in times of high inflation. Over the long term, changes in the money supply and real interest rates drive the price of gold. In modern times of loose monetary policy, when value of fiat currencies like the Dollar tends to erode with increased supply and interest rates give negative returns when adjusted for inflation, gold tends to do well, preserving purchasing power. Over the last decade, the annualized rupee return from gold has been 11%. During the same period, the CPI index has compounded at 6%. Hence, it can be stated that over longer periods, gold prices can be expected to largely keep pace with real increases in the cost of living.

In 2022 gold remains as relevant as ever. The world is in the midst of a full-blown war. Inflation in the developed world is at multi-decade highs. Financial markets are uncomfortably turbulent. There is a good chance that the global economy will enter a recession within the next two years. Central Banks find themselves in a conundrum. Raise rates and risk a recession or leave them low and face the wrath of inflation. It’s hard to imagine a more ideal scenario for gold.

So, while you may not see eye to eye with your parents on most things like choice of career or when and whom to marry, when it comes to investing, it may be a good idea to appreciate gold’s long track record, pay heed to your parents and invest in the precious metal. And given the current weakness in prices, now may be a good time to start.

Given that you are more informed and technologically savvy, you should ideally improvise how you go about investing in the asset class though. A foray into physical gold would at the minimum require an investment of 1 gram or approximately Rs 5,000 in today’s prices. In contrast, you can start investing in financial forms of gold like Gold ETFs at 0.01 grams which amounts to just Rs 50! Gold ETFs are mandated and regulated to invest only in 24 carat gold. On the other hand, you may never be sure of the purity of your physical gold. Gold ETFs also give you the benefit of wholesale prices and no making charges, optimizing price efficiency and in turn your returns. And finally, unlike physical gold, you can quickly and easily liquidate your position in Gold ETFs online in the comfort of your home.


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