Gold has proven its mettle for long-term investing

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Gold has a unique relationship with uncertainty. Whenever there has been geopolitical or economic turmoil, investors have sought the safety of gold to mitigate risks. This holds true today as well.

The price of the yellow metal is currently hovering near the $2,000 per ounce mark, and industry experts suggest that gold may be entering the next stage of a powerful bull market. Several factors might be at play here, but let's first examine the returns generated by gold.

When comparing the return on the price of gold with the Dow Jones Industrial Average (DJIA), it's evident that the yellow metal has outperformed the US equity index on two occasions. Over the last five years, from October 2018 to the present, the price of gold has risen by 65 per cent, while the DJIA has seen a 29 per cent increase. However, if we extend the investment period back to October 2013, the DJIA has risen by 109 per cent, whereas gold prices have increased by 51 per cent during the same period.

Historically, gold has held a special place in the human psyche for centuries, revered for its intrinsic beauty and enduring value. In the world of finance and investment, gold occupies a unique position as a tangible asset, a hedge against economic uncertainty, and a diversification tool — equally appealing to both retail and institutional investors.

According to the latest report by the World Gold Council, "Gold is likely to face some choppiness over the next few weeks as rising real yields, a stronger US dollar, and a robust economy impact some sectors of investment demand. However, longer-term concerns and ongoing central bank buying should, in our view, ensure that this turbulence doesn't establish a more significant downtrend. As such, this could present potential gold buying opportunities for some investors. Historically, gold has tended to mean revert when the market (futures positioning) becomes excessively short."

Forms of gold investment

Investors have several options when it comes to investing in gold, each with its own advantages and disadvantages, catering to different investment objectives and risk tolerances.

1. Physical Gold: This is the most tangible form of gold investment, often in the form of coins or bars. Investors can purchase and store physical gold themselves, or they can utilize a secure storage facility. Owning physical gold provides a sense of security, as it's not subject to counterparty risk. However, it comes with storage and insurance costs, and selling physical gold can be less liquid than other forms of investment.

2. Gold ETFs: Exchange-traded funds (ETFs) are a convenient way to gain exposure to gold without the need to physically own it. These funds track the price of gold and are traded on stock exchanges. Gold ETFs offer liquidity, diversification, and cost-efficiency. They are also accessible to individual investors and can be bought and sold like stocks.

3. Gold mutual funds: These funds invest in a portfolio of various gold-related assets, such as mining company stocks, rather than physical gold itself. Investing in gold mutual funds provides diversification across different assets within the gold industry, reducing the risk associated with any single investment. They are a suitable option for those looking for exposure to the gold market without owning physical gold.

4. Gold mining stocks: Investing in gold mining companies allows investors to profit from the performance of the gold industry without the need to buy physical gold. However, the performance of gold mining stocks can be influenced by various factors, including management decisions and operational challenges, which can introduce additional risk compared to holding physical gold.

The role of gold in a portfolio

The role of gold in a portfolio can vary depending on the investor's objectives, risk tolerance, and market conditions. Here are some key reasons why gold can be a valuable addition to an investment portfolio:

1. Diversification: Gold has a low correlation with traditional asset classes like stocks and bonds. When these assets decline in value, gold may act as a hedge, helping to preserve wealth and reduce overall portfolio risk.

2. Safe Haven: In times of economic uncertainty or market volatility, investors often turn to gold as a safe haven. Gold tends to perform well during periods of crisis, making it a valuable asset to hold in turbulent times.

3. Inflation hedge: Gold is often seen as a hedge against inflation. When the purchasing power of paper currencies erodes due to rising inflation, the real value of gold tends to increase.

4. Currency hedge: As a store of value, gold can protect investors from the depreciation of their own currency. This is particularly relevant for investors in countries with unstable or depreciating currencies.

5. Portfolio stability: Gold's stability and ability to preserve value over time can enhance the overall stability of a portfolio, reducing the impact of market fluctuations.

Risks and considerations

While gold has many attractive qualities as an investment, it's essential to consider the potential risks and drawbacks:

1. Storage costs: Owning physical gold comes with storage and insurance costs, which can erode the returns on your investment.

2. Lack of income: Gold does not generate income, such as dividends or interest. This can be a disadvantage for income-oriented investors.

3. Market timing: Timing the gold market can be challenging, as it can be influenced by various factors, including global economic conditions, geopolitical events, and investor sentiment.

4. Regulatory and tax considerations: Different forms of gold investment may have tax implications and regulatory requirements. It's essential to understand these factors before investing.

In today's complex investment landscape, gold continues to play a crucial role for investors. It is not only a timeless symbol of wealth but also a practical and versatile asset that can be a valuable addition to a diversified portfolio. However, it's important to note that gold jewellery does not equate to investments.

Suneeti Ahuja-Kohli is an independent journalist based in Dubai. She can be reached at suneetiahujakohli@gmail.com