Should you invest in Gold post Brexit and other Global uncertainties?
After a bleak phase of three years, Gold is getting its sheen back. In the past year, the yellow metal has given an average annual return of 15 percent. Even in terms of extremely short-term perspective, i.e.; between one and three months the returns were between 6.6 and 8.3 percent. Gold has always been a golden asset to rely on during times of global uncertainties. Gold funds did remarkably fall post the global economic crisis in 2008, but for the past three years, it took a beating. With global uncertainties looking ahead in future in the form of issues like the future of EU after Brexit and an unpredictable political scenario in the US, the prospect of Gold as a preferred form of investment is high.
Cautious investors as well as trade pundits are vouching for Gold as a safe option with good returns in uncertain times. So while the general mood is to play safe, should you really go for the Gold? Here are a few things to know –
1. Gold is not an investment – This may come as a surprise, but the fact is that Gold is not an investment option, it is at best a hedge against financial shocks. For instance, when you invest in an equity-based mutual fund or in direct equities, you own a part of the company that is involved in the business. Even in case of debt funds, you earn interest. But Gold is just a commodity, it does not generate income. The value of Gold rises and falls depending on the demand for the commodity. Of course, Gold does give good returns when market sentiments are down, but these are phases which do not last long. So over a period of time, if you are looking for wealth creation which is often the basis of investment, you would do well investing in equity mutual funds.
2. Gold may not give you excellent returns – Gold may glitter but not for long. Even if we take the Brexit case and the uncertainty of the European Union, the negotiations will go on for a year or two, before the markets start rising again. Like we said, the markets move in cycles; so while the world takes a pensive stance over economic uncertainties, the demand for Gold will remain high. But once the market changes for the better, the value of Gold will be hit as investors will ditch the yellow better for lucrative options like stocks. Thus, if you are looking for long-term investment, you should not be bothered about economic uncertainties, and focus on equities. Also, it has been seen that gold gives poor returns on a long-term basis.
3. Do you really need to diversify into gold? Some people say that Gold should be added for portfolio diversification. Frankly speaking, an investor who has a small or medium-sized corpus does not need to diversify into Gold, because it can affect the overall returns on a long-term basis. Diversification into every asset just for the sake of it, is not needed; the focus should be on optimizing returns.
4. If needed, diversify into gold in a limited manner – If you are a Gold fan and would still want to invest in it, limit your allocation. Ideally do not invest more than 5 to 10 percent in Gold. While Gold offer stability during periods of economic crisis, they can notoriously bring your overall returns down in the long run. There have been some gold ETFs that gave an impressive 25 to 30 percent annual returns post 2008 for three years, before they nose-dived to nothingness. By 2012, they were giving 9 to 10 percent returns and in the periods 2013-2015, the returns were below zero to 1 percent, which simply means; the investors lost their money.
It is possible that there is going to be a Gold rush in the next few months. You may expect to reap some benefits for the next two years or so, but once the market scenario changes and improves, Gold will lose its value. So, if you are looking for wealth creation, then ditch the Gold and stay invested in equities.