Why Time is Ripe for You to Invest in Gold
KEY POINTS
Over the last two decades, gold and real estate investment trusts, outperformed most broad-based portfolio components, giving an average annual return of around 11 percent.
KEY TAKEAWAYS
With less opportunity for yield across fixed-income assets, investors will likely continue to shift exposure to risks through their asset allocation portfolios.
As an investor, how do you know that it is the right time to venture into a gold investment? Well, the conditions created by Covid-19 seem perfect for the price of gold to rise, but is it now the best investment asset available?
Investors all over the world have faced unprecedented challenges as the first global pandemic in a century ravaged the world economy. The fact that the pandemic continues to define the 2022 outlook suggests that fiscal and monetary support remains essential on the road to recovery.
In the middle of the pandemic, Central banks around the world effectively took interest rates to zero. With less opportunity for yield across fixed-income assets, investors will likely continue to shift exposure to risks through their asset allocation portfolios.
According to the Zurich-based World Gold Council (WGC), not only could investors benefit from gold’s role as a diversifier amid ballooning budget deficits, inflationary pressures, and potential market corrections, but they may also see additional support, as gold consumption will likely benefit from the nascent economic recovery, especially in emerging markets.
Gold has been the traditional haven for both governments and investors during times of crisis. The indications are that gold will sustain its glitter as an investment asset class even in 2022.
Usually, a sound investment portfolio would comprise a basket of asset classes to spread the risks. This includes treasury bills (gilts), corporate bonds, equities, real estate, commodities (including gold), and cash. Recently, they have also included derivatives such as ETFs (exchange-traded funds).
The reasons for investing in gold as a strategic investment asset, especially during tough economic times are manifold. Gold started the year on a positive note. The WGC says that it was one of the best-performing assets, returning investors an impressive 25 percent in 2021.
Over the last two decades, gold and real estate investment trusts, outperformed most broad-based portfolio components, giving an average annual return of around 11 percent.
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Various factors suggesting gold is a good investment venture in the current uncertain economic and political environment include;
- A proven hedge against inflation
In times of low-interest rates – in the US, UK, and EU they are currently almost zero – with reduced consumption, investment, and increased financial stress, demand for gold increases. The pandemic has especially pushed the above trends and has created the perfect conditions for gold prices to increase.
The market dynamics and perceptions of gold within an institutional investment portfolio have changed over the past two decades. This has reflected an increase of wealth in China, India, and Brazil, and a growing middle class in many emerging markets, including Africa.
Its role as a safe-haven asset means it comes into its own during times of high risk. This dynamic, according to WGC, is likely to continue, given ongoing political and economic uncertainty.
- Sustained demand dynamics
The demand for gold comes from four important sources including investors as a haven asset class (42%), from central banks as a reserve asset (17%), from consumers for jewelry (34%); and industry as a technology component (7%).
In other ways, the demand for gold is also connected to investment and consumption. Its performance is driven by economic expansion and periods of growth that support jewelry, technology, and long-term savings.
Increased risk and uncertainty often boost investment demand for gold as a haven. Also, interest rates and relative currency strengths influence investor attitudes towards gold.
According to the IMF, the US had by far the largest gold holdings in the world in January 2021 – 8,133.5 tones, comprising a staggering 78% of its reserves; followed by Germany with 3,362.4 tones, comprising 75.2% of its reserves.
In Africa, Algeria had the highest holdings at 73.6 tones (16.3% of reserves), followed by South Africa with 125.3 tones (13.4% of reserves).
- An improving global economic outlook
Global GDP growth in 2021 was 5.2%. This is because social distancing and other measures to contain the pandemic were successful. Also, fiscal, monetary and s