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Gold

Gold- the all time favourite household investment. It would surprise many that Gold is categorized into less than 12% return giving instrument.

This investment proved remarkable from 2006 to 2011.During that time span Gold had given average return of 29% per annum .However, the long term average return on gold investment is less than 10% p.a.

As one can say technically or ironically but history always repeats itself. Therefore, we may once again observe the similar less than 10% appreciation pattern in gold prices in near future.

Why Gold?

There are 2 primary reasons why one invests in gold.

1- Hedge against inflation. Over a period of time, the return on gold investment is in line with the rate of inflation. If inflation were to run its full course, as it happened in Zimbabwe, which went under a period of hyper inflation (2008), the only bankable asset would be tangible assets. Paper currency could become worthless as well as debt denominated in that currency. This means that prices in paper currency terms would also be of no meaning. All assets are then priced in terms of other assets, especially those that have monetary properties and will trade at a premium because they are more useful in asset exchange transactions. In such situations, gold acts as the perfect hedge against inflation.

2- Gold is negatively correlated to equity investments. Say for example 2007 onwards, the equity markets started performing poorly whereas the gold has performed well. So having gold as an investment option in your portfolio mix will help you reduce the overall volatility of your portfolio.

How much to invest in Gold?

5% to 10% of your Total assets can be invested in gold. If you invest more in gold, remember in the long term return on gold investment is less than 10% p.a.
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