Invest in Gold and Diversify Your Portfolio to Mitigate Market Volatility

You invest in a particular investment option to earn good returns. Your portfolio may consist of equity-linked instruments to make high profits. However, certain developments that are not under your control affect the performance of your investments. These developments include an economic slowdown and international trade difficulties. 

The current trade war between China and the United States started back in 2018 when the US imposed new duties and tariffs on Chinese products. China, in retaliation, imposed higher taxes on American products. The two nations have failed to arrive at an understanding since then and are involved in a trade war, affecting the emerging markets around the globe.

As a result of the Sino-American trade showdown, the equity markets are volatile. The returns offered by the stock markets have been subdued over the last year and a half. This has become a matter of concern for investors as they are not getting the returns they expected. The IMF and World Bank have got down the global growth forecast to 2.6% and 3.2% respectively for the year 2019. 

The global trade uncertainty has weighed in on the financial markets around the globe. The economic growth has been curtailed to touch fresh lows. Investors are experiencing minimal to no gains from their equity investments due to market volatility, making the investments in stocks risky. This has forced institutional investors and mutual funds to reshuffle their investments by including gold in their portfolios. 

Naturally, when there is demand for a particular product, the price goes up. This is what has happened with gold. The gold prices have shot up by 18% so far in the year 2019. This is the most significant gain recorded in the gold prices in nearly two years. The year 2018 saw gold offering negative returns. Traditionally, gold is seen as a safe-haven at times of crisis by the investors. 

The following graph shows the gold price over the last five years:

Historically, the gold prices shoot up at times of economic uncertainties. The subprime mortgage crisis that broke in 2008 crisis resulted in a worldwide recession. The demand for gold surged during the recessionary period.

Gold prices gained almost 100 per cent from 2008 to 2011. The gold price touched USD 869.75 an ounce back in the year 2008. Furthermore, it touched the all-time high of USD 1,895 in September 2011 on the rumours of the United States defaulting on its debt papers.

Also Read: 24k Gold Rate in India for October 2019: Week 1

In times of economic uncertainty, your portfolio would be low or in negative terrain. Considering that, it’s only wise to diversify your portfolio with gold and gold-backed instruments. The current global economic developments are not something that would delight investors; it’s rather damp. 

The domestic growth forecast has been lowered by India, China, and the USA. This too calls for diversification of your portfolio. The IMF and the World Bank have slashed the growth forecast for the year 2019.

There are various ways of investing in gold. You can consider investing in gold exchange-traded funds (ETFs) and sovereign gold bonds. The units of ETF are available in the smallest size of 1 unit equal to 1 gram of gold.

Due to ease of availability and small size of the investment, small investors too can invest in gold ETFs. The Government of India has also introduced a Sovereign Gold Bond Scheme for long term investments in gold. 

Hence, investors need to reshuffle their equity investments and include gold in their portfolio to be on the safer side. Its better being late than sorry.

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in