Over the last few months, it is not just the rising number of Covid-19 cases which have been hitting the peak. If there is one more thing which has been rising steadily and hitting new highs, it is gold.
With the price of 24-carat gold hitting almost Rs. 53,300 per 10 grams many investors are asking a common question “Should I include gold in my portfolio?”
To know the answer to this question, let’s understand first why people like to buy gold or invest in gold.
Gold is a tangible asset. It can be touched and felt physically. Apart from the feel-good factor, people buy gold because it is considered as a safe haven when markets are falling, or economies are collapsing.
But don’t forget that gold lying dormant in your bank locker is an illiquid asset which does not produce anything unless and until you actually sell it.
No volatility in gold is just a myth
Gold prices are highly volatile too. It is affected by the factors affecting the economy such as inflation, GDP numbers and political uncertainty, which explains why there are wild swings in gold prices from time to time.
Successful investors don’t recommend including gold in investment portfolio
Successful investors like Warren Buffet have always believed that gold is an unproductive asset and never advocated making it a part of one’s investment portfolio.
In a letter to Berkshire Hathaway shareholders Buffet wrote “Like all unproductive assets, gold is not “procreative.”
In simple words, what it implies is that gold will never produce more gold, or anything else of value, for that matter. On the other hand, an investment in stocks will generate dividends which can be used to buy even more shares. But a gram of gold you buy today will still be a gram of gold after several years.
The second shortcoming of gold, according to Warren Buffett in his letter to Berkshire’s shareholders, is the lack of practical use for gold. Buffet pointed out that gold is used to make jewellery and has some other applications, but there is simply no widespread demand for gold.
Here are another golden words of wisdom by Warren Buffet in a 1998 speech at Harvard “It is dug out of the ground in Africa, or someplace. We then melt it down, dig another hole, bury it again and pay people for guarding it. It has no utility. Anybody watching from Mars would be scratching their head”.
Gold’s value has indeed been growing over time. But don’t forget the cons like storage costs for renting bank lockers and the always looming threat of theft. And remember bank lockers are not liable for loss of content stored in them. So, don\’t think that your gold is 100% safe in a bank. If you still want to hold gold in your portfolio, restrict it to just 5-10% of your overall portfolio and not more.
Whether it is investing in gold or equity it is very important to invest according to one’s risk appetite and financial goals. In case you need any expert guidance with creating a winning equity portfolio click here.