Gold is an evergreen investment among all classes of investors. With most other investment options stressed and available at expensive valuations, buying gold is one of the options in 2021.
Why Invest in Gold in 2021
Gold has maintained and increased its value consistently over the years. People across the world rely on gold as the means to preserve and pass on their wealth. In 2021, there are even more reasons to invest in gold.
Investors consider gold as a safe haven. In times of uncertainty, people flock to gold as a safe investment. Demand for these metals has always increased during a crisis when confidence in governments and financial markets are low. The ongoing COVID-19 crisis is no exception.
Gold has always been the best hedge against inflation. Many governments print currency as a shortcut to tide over the economic crisis caused by the pandemic. This erodes the value of the fiat currency and triggers inflation. More and more people start to buy or hoard gold, to preserve the value of their wealth. For instance, a weak US dollar, owing to increased money printing, or any other reason, increase the value of gold.
While the value of fiat money declines due to uncontrolled printing, there is a limited increase in the gold supply. Most of the fresh gold supply since the 1990s is from the sale of bullion held in the vaults of banks across the world. The mining of gold is declining. It takes more than ten years to bring a new mine into operation.
The price of bullion has historically been inverse to bond yields. In other words, the value of gold increases when yields of bonds go down. During tough economic conditions, as prevalent now, central banks adopt quantitative easing to improve liquidity. This lowers yields from bonds, and cause gold prices to move upward.
Many traders look at the opportunity costs when making investments. They may invest in stocks for higher returns. But the stock market is highly volatile, and risky. Even blue-chip stocks go down during a market crash. When investors enter a market at peaks, they may enter the stock at high valuations, and miss out on high returns. They may even end up with negative returns. Most stocks are now trading at very expensive valuations. The prices of most stocks do not match the state of the economy on the ground. Such a situation indicates a bubble forming and a possible crash soon. Gold is relatively immune to such bubbles, and offers stability to any investment portfolio.
Top Four Reasons to Buy Gold Now
- Gold has historically provided good, competitive returns, compared to other asset classes. Bullion prices fluctuate and even reduce at times, but with limited downside. Gold always retains its appeal among investors and recovers the lost value soon. Gold offers good diversification to mitigate possible losses in stocks.
- Gold has remained a safe and steady choice during times of financial crisis, as a hedge against currency and inflation risks. With the coronavirus pandemic triggering economic uncertainty, the best time to buy gold is now. And the post-pandemic economic recovery will boost gold prices further. As the economy improves, more people will buy gold in physical form, increasing demand for all types of gold. The precious metal has always been in demand as the store of value. India, one of the biggest markets for physical gold, will see increased consumption of gold, owing to pent-up demand. India and China together account for about 60 percent of the global gold consumption. The gold market is global. An increase in demand in one area will result in an increase in price all over the world. The only differentiator would be the currency fluctuations.
- Another good reason to buy gold is the stability of the ecosystem. The price depends on demand, supply, and investor behaviour. Investor behaviour is reflective of expectations regarding supply and demand. The London Bullion Market Association considers these factors and fixes the average price daily at 10:30 am and 3 pm GMT. The market participants agree to buy and sell gold at these prices.
- Gold has always been the favourite of a conservative investor. Now, even the most bullish and aggressive traders hold gold as part of their portfolio.
What’s the Best Way to Buy Gold in 2021?
There are several ways to invest in gold:
- Exchange funds, stocks, gold mutual funds, and futures are the most popular options among traders. These options make it easy to include gold as financial assets.
- Gold ETFs are passive instruments that track the price of bullion. Depending on the fund, it may also track a basket of gold shares, widening the exposure.
- Active traders may speculate on gold through futures, options, and spot prices. Trading in spot gold, where the price reflects the cost of one troy ounce of gold, allows exposure to bullion without taking ownership. Gold Futures come as standardised contracts with fixed quality and quantity. The price fluctuates depending on market forces. Options are similar to futures, but the trader may forego the option price instead of making good the promise to buy.
- An indirect way to invest in gold is by buying stocks, such as shares of gold mining companies. Investors could also buy mutual funds that hold shares of companies dealing in gold. Gold companies employ miners to extract gold from mines or indulge in the wholesale trade. Investors leverage the differences in the wholesale and retail price, apart from the daily rate differences. But the prices of gold stocks do not necessarily match the price of bullion.
- The traditional method to invest in gold is by holding gold in physical form. This option includes gold coins, gold bars, and gold jewelry. But these options attract considerable holding charges in the form of safe deposit lockers and carry the risk of theft. Gold stored in physical form also has comparatively low liquidity.
- Bullion dealers and banks sell digital gold to their customers. Such digital gold has the back-up of physical bullion. The end investor does not have to worry about theft or storage.
Any form of gold is a good investment. All investment types include the basic bullion price. But the other factors connected with the investment cause price differentials. For instance, the share price of a gold mining company depends not just on the price of the gold. Other factors such as the efficiency of the company and transportation costs influence the price. Jewelry attracts making charges, in addition to the inherent cost of gold. Digital gold attracts storage charges. On the other hand, Exchange-traded funds track the actual price of bullion.
Electronic options offer convenient ticket size, compared to physical mode. For instance, a small investor holding digital gold, or ETF mode could buy or sell one or two units, as desired. But it is not possible to buy or sell a fraction of a gold coin or a gold bar.
The best time to buy gold is now. Gold has always been one of the best assets to hold, for any investor. The yellow metal has provided a steady return on investment for decades. Gold bugs, or persons bullish on gold, are all set to reap rich dividends in the near future even as other asset classes remain stressed.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.