With an 11% return in 2022, gold was the best-performing asset class, beating equities, debt, real estate etc, by a considerable margin.
Rishi Piparaiya explains why gold needs to be a part of our investment portfolio.
Let me answer the question right off the bat. Gold is always a safe haven in any economic climate. And in this day and age, with so much uncertainty around us, it is all the more important that one has gold as part of their overall asset allocation.
We often make the mistake of measuring every investment in terms of returns. The purpose of an investment is not simply to give you returns. It could also provide you with peace of mind. It could reduce the risk of your portfolio. It could be to make you feel happier. And gold fulfils a lot of these purposes.
Universal store of value
Gold has been used as a currency and store of value for centuries. And while today's currencies may or may not exist hundreds of years later, gold certainly will.
As Richard Russell, author of Dow Theory Letters, aptly stated, 'Gold will be around; gold will be money when the dollar and the euro and the yuan and the ringgit are mere memories.'
It is rare, can be easily transported, and holds universal value -- you could conceivably take a gold coin anywhere in the world and convert it to buy whatever you need.
Diversification
Gold does not mimic the equity markets; it has its own trajectory. More often than not, when equities are doing poorly, gold really shines (no pun intended!).
When markets are crashing, people tend to move out of equities to safer assets. And gold is a top choice.
Take 2020, when the Covid pandemic hit us, the markets crashed by 40 per cent by March 2020 as concerns about Covid gripped the world. Gold in the same period rose 12 per cent.
By October 2020, markets had corrected back to their original levels. Gold had continued its upward march and was up 20 per cent. When things go wrong, gold is one of the safest assets to hold.
Intrinsic value
Gold has inherent value because it is rare. Excerpting from my book, Three Pigs to Financial Freedom, 'If we were to collect all the gold that has been mined in the world, from the beginning of time until now, melt it and then put it in a cube, the cube would be only 28 metres all around. That is essentially the size of two basketball courts and about 90 feet high.'
So, owning a little bit of such a scarce metal is undoubtedly worth it.
Functional appeal
You cannot wear your mutual fund.
You cannot use your insurance policies as artefacts.
You cannot gift a bank account in a little velvet pouch to your new-born niece or nephew as a gift for posterity.
You can do all that with gold.
While you can invest in gold in digital form, there is absolutely no harm in buying it physically, as jewellery, ornaments, coins etc, if you will use and enjoy it.
Steady returns
The returns on gold may not always match asset classes like equities, but they are certainly not insignificant. With an 11 per cent return in 2022, gold was, in fact, the best-performing asset class, beating equities, debt, real estate etc, by a considerable margin.
Moreover, over the past decade, gold has been delivering an average 7 per cent compounded return which is very reasonable. And if significant economic or social uncertainty is on the horizon, it could perform even better.
Gold does not have to be a large part of your portfolio; you need other asset classes to build a diversified portfolio.
But it should have a permanent place, and always having gold anywhere from 5 per cent to 15 per cent is a prudent step.
Rishi Piparaiya is the author of Three Pigs To Financial Freedom, Cities Of Adventure, Job Be Damned and Aisle Be Damned.
