While many people know about investing in stocks and bonds, newbie investors tend to overlook alternative investments, such as gold. But gold can actually be a profitable asset and a great way to spread out risk across your investment portfolio through diversification.
Last year’s Covid-19 pandemic has shown just how important it is to hedge yourself against asset risk, as economic conditions can take an unexpected turn. As the world faces uncertainty, gold can act as a “rescue asset” that continues to reap market returns. Here’s how.
1. Gold acts as a hedge against inflation
As the economy starts to recover from the pandemic’s impact, central banks across the globe may reduce interest rates to stimulate economic growth.
By decreasing interest rates, governments can lower the cost of borrowing. In turn, this encourages higher investment spending and household consumption. The increased spending theoretically promotes economic stabilisation and growth during a recession.
However, when countries lower their interest rates, their currency also depreciates. This stimulates growth for the economy but also causes inflation to occur. Liquid assets, such as cash and stocks, are particularly prone to an erosion of their value in these circumstances.
Although gold is priced in US dollars, its value will not necessarily depreciate along with fiat currency since the former is an entirely different asset class. In fact, if a currency loses value due to inflation, the price of gold will rise with every ounce. For example, when fiat currency depreciates, you would need more fiat money to buy the same amount of gold. Hence, gold will be able to protect itself against decreasing purchasing power if inflation occurs.
For instance, at the end of 2020, the prospects of a large US fiscal stimulus caused the US dollar to drop to its lowest in two years. As a result, gold prices rose. In fact, gold is predicted to remain relatively bullish in 2021.
What all this means is that while your other investments may suffer from a depreciation of US dollars, you can hedge your investments against a weakening US dollar when you invest in gold.
2. Gold holds its value in the face of economic and political uncertainties
When geopolitical or economic tensions rise, gold prices tend to go up. Economic uncertainties lead to fluctuations in fiat money and interest rates, and in drastic cases, prompt governments to roll out large fiscal stimulus packages or push countries into recessions. These situations cause gold to be more attractive to investors, as it has a negative correlation to the effects of interest rates and the US dollar.
During the Covid-19 pandemic, for example, gold prices remained strong, even as the value of fiat money fell with governments rolling out huge stimulus packages to help bolster the economy. Meanwhile, gold prices also soared amid the political turmoil of the 2020 US presidential elections.
3. Gold withstands volatility better than other assets
Market downturns occur from time to time, so it’s important to diversify your investment portfolio to make yourself less vulnerable to short-term market volatility. You can do so by investing in gold, which is an asset class of its own and isn’t dependent on the rise and fall of the stock market.
During volatile times, factors like inflation may negatively affect investment returns. Inflation would decrease the value of a dollar over time, which means that assets may be sold at a loss. But when you invest in gold, it can act as a hedge against inflation as it still retains its intrinsic value. Thus, investors’ appetite for gold tends to rise during uncertain times.
How do you start investing in gold?
As a low-cost investment with relatively low risks, gold is a great asset to hold even if you’re just starting your investment journey.
There are many online trading platforms available for you if you wish to trade gold. If you prefer a convenient platform to trade anytime and anywhere, Everest Gold allows you to buy and sell gold easily through an app. You can check for the latest updates on gold prices on-the-go wherever you are!
Trading gold doesn’t have to be daunting or confusing. You may be hesitant to start if you have to set aside a lot of money to invest in an asset. But you don’t have to worry about putting aside large amounts of money to invest in gold—you can start investing through Everest Gold with just USD 0.60.
Like all other assets, Gold is prone to fluctuations in prices and how the economy is doing. However, it can also act as a safe-haven investment that you can add to your investment portfolio and may bolster the rest of your assets when there is a falling stock market or depreciation of currencies.
Not sure where and how to start? Find out more about why you should trade with Everest Gold here!