Thursday, March 12, 2009

WHY INVESTING IN GOLD MAKES SENSE FOR EVERY INVESTOR

For any investor worth his salt, a portfolio without gold in it is a bit embarrassing because there are compelling reasons for buying /investing in gold. The investment in gold makes more sense today than it did ever before. In India, there is an old practise of investing in gold via ornaments etc which is a very health practice as it helps every household diversify its investment portfolio to that extent.(Though gold bars would be much better).

The reason why investing in gold is a fantastic idea for you me and everyone else is because of the following inherent advantages that it offers as an investment class:

1. Acts as "Quasi Currency"

Almost all the paper currencies of the world right from dollar to pound to euro to all other currencies of the world is backed by physical gold. Gold determines which country can print how much paper currency as the value of paper currency like dollar($) lies in the physical gold behind it as security. So primarily gold is main currency of the world and hence its value is unquestionable unlike paper currencies. It will always have some intrinsic value for holders of the physical gold.

2. Most Liquid Asset

Gold is among the most liquid asset in the world. The holder of physical gold can convert it into currency at any time. Whenever one gets into a distress situation financially , the best thing one can hope for then beyond cash would be gold because its such a liquid asset.The liquidity offered by gold makes it a very compelling investment tool. No one ever get stuck with gold if he wanted to sell it .

3.Hedge against Inflation

Gold also is known as the best asset class to hedge against inflation. Lets understand this is in little detail. We now know that all paper currencies of the world derive their value from the underlying gold as security and all the currencies are backed by physical gold. Now since paper currencies are printed by governments all over the world, they might print more money sometimes without really increasing the gold as security backing them. Essentially this means that governments just print paper money and circulate it into the market. For example, today most of the Central Banks in the world are printing money and infusing it into the system via financial stimulus package to restart the economy in the wake of recession that the world is facing today. This leads to more money chasing fewer goods leading to inflation. But since gold can not be produced in unlimited quantities, the value of gold with respect to the dollar/any other paper currency goes up. This also explains the reason why the value of dollar is inversely proportional to the value of gold.Thus in inflationary environment gold offers good hedge for all its investors.

4.For Diversification sake

One of the thumb rules of investing is to adhere to the principle of diversification i.e. to invest in multiple asset classes to spread risk. Gold investment provides very good diversification to the portfolios of all investors. It protects the portfolio in inflationary environment from loosing its intrinsic value and subsequent returns for the investor.

Thus, investing in gold is a must for all prudent investors. Have at least 5-10% of your portfolio invested in gold to reap the benefits of a well diversified portfolio.

Stay wise n Stay Wealthy....


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