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Why do investors rush to gold in times of market turmoil?

By Finserv MARKETS - Aug 2,2019
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Why do investors rush to gold in times of market turmoil?

Sometimes films can provide interesting insights into human behaviour. Many people consider films to be a reflection of society. Numerous Bollywood films have shown lead characters selling family gold to stay afloat in times of need. Why is gold always shown as a last resort? Why do people liquidate investments like stocks before selling gold? The basic answer is very simple. Gold is considered a very stable and safe investment. It is also more liquid than other physical assets like real estate. Whenever dark clouds loom over the stock markets or the general economy, experts recommend investing in gold. Gold’s centuries-old connection to wealth and power too plays its part as perception plays a big role in investing. Is it just hollow recommendations or investing in gold in uncertain times has some solid rationale backing it? Let us try to understand why investors flock to gold in times of market turmoil.

Why do investors rush to gold in times of market turmoil?

Source: Jagoinvestor.com

Negative correlation to markets

To understand what makes gold a go-to option in times of market correction, we will have to understand the strength of both the investments. Markets are dependent on the performance of the economy. If the economy is in good shape, companies make more profit and the stocks appreciate. Now, stocks are intangible assets, it is held in dematerialised form. As soon as the forecast turns bleak, stocks tumble and with it, the value of the investment erodes. Gold is a safe haven for investors due to a variety of reasons, a high intrinsic value being one. It has been historically observed that in times of economic turmoil, gold prices remain largely stable. As a contrarian bet, gold is one of the best investments. But if you are focussed on returns in normal economic times, gold may under perform other assets. The advent of digital gold has made investing in gold extremely easy and hassle-free. At Finserv MARKETS, you can buy digital gold, even in very small quantities, in two simple steps.

Why do investors rush to gold in times of market turmoil?

Source: goldsilver.com

Hedge against Inflation

Many people believe gold generates returns in line with inflation or below inflation. They may be correct, but only in times of booming economy and rising markets. During prolonged high inflation spells, when the value of currency declines, gold successfully preserves value. Gold prices rise in tandem with the cost of living. Investors have witnessed gold prices soar, while stock markets plunge in high-inflation years. This happens as gold priced in local currency units tends to rise along with other commodities, even though the fiat currency loses value to inflation.

Tangible Asset

Gold has been a valuable and special commodity since ancient times. In times of market turmoil, investors may lose the entire value of their holding in a very short time. Stocks or other financial assets are held in dematerialised form, while gold is a tangible asset. Being a tangible asset, you have a sense of control over it, which for many investors is an appealing proposition. In an era of digital payments, when most of the currency cannot be touched, having a tangible product is very assuring. But physical gold has significant security expenses, which can be eliminated through digital gold. Digital gold can be easily bought and is backed by physical gold of the same quantity. It provides stability without the additional cost of security.

Helps to create a balanced portfolio

Investing is the art of balancing risks with rewards. Investments in the equity markets generate handsome returns but are prone to various risks. Investors should always aim to have a balanced portfolio. Stocks pay dividends and bonuses, while bonds and savings accounts pay interest, so the original investment grows. Gold doesn’t pay regularly but compensates with the safety it provides. When markets enter into a bear zone, financial assets come under pressure, but gold remains stable. The price of gold may fluctuate but the value remains stable.

Why do investors rush to gold in times of market turmoil?

Source: Business Standard

Conclusion

Markets can gyrate wildly in uncertain times. Investors shouldn’t be always chasing returns. Precious metals have fallen out of favour due to an excessive obsession with high returns. When it is sunny, no one needs an umbrella, but in overcast conditions, it becomes a necessity. But you cannot always run to the umbrella shop when it starts raining. Similarly, buying gold when the market becomes volatile may not be the best strategy. Holding an adequate amount of bullion is the wise thing to do. Now you can invest in gold by buying digital gold. At Finserv MARKETS, you can monitor prevailing gold prices and take a well-informed decision to buy digital gold.

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