February 20 2021

Why is Gold a Low-Risk Investment?

Aren’t we all looking for financial stability? Investing is a great way to achieve it. The sooner you start investing, the more money you will be able to make, and the sooner you’ll be financially secure. However, financial stability is likely to be achieved with a low-risk investment option.

Investing has a plethora of benefits; making profits and increasing your wealth, fighting the effects of inflation, preparing for emergencies, staying out of debt, attaining future financial milestones, and saving up for when you retire.

Of course, instead of just spending your money, you should always be saving some. But saving only might not be enough. To grow your wealth, and also reap multiple other benefits, one should consider investing their money.

There is an abundance of investment options available to choose from. Amongst these are bank certificates, bonds, stocks, real estate, mutual funds, and precious metals. A certain degree of risk is involved in all of these options.

Although high-risk vehicles will grant you higher returns, you might be at a stage in your life where you can’t afford to lose your money. If you are someone who is looking for a low-risk investment option to protect your wealth or aren’t looking for immediate returns, you should consider investing in gold.

Gold is a Safe-Haven Investment

Smart investors use safe-haven investments to minimize losses during periods of economic downturn. Gold, mutual funds, and fixed deposits are all examples of low-risk investment options that investors use to diversify their portfolios. Where mutual funds and fixed deposits are considered safe investments as well, gold is still the most profitable low-risk investment option.  That’s why experts usually recommend that investors dedicate up to 25% of their portfolios to the gold investment.

Gold Vs Mutual Funds and Fixed Deposits

There are multiple reasons why gold reins above all low-risk investment options. Firstly, mutual funds and fixed deposits are not very well understood by the layperson and are thus not opted for by many. Secondly, they provide paltry returns that offer little to no value to the investor.

Because they might be incredibly safe, they are not exactly an investment because they barely increase in 2-3 years whereas gold does. Gold is truly a safe-haven investment. If you can buy and hold it, rest assured that over time its value will grow. In fact, you are likely to see results within 3-5 years.

Since gold is an internationally traded commodity, the gold market is in constant flux and gold prices tend to fluctuate, which affects your returns. That being said, its prices remain largely steady in the long-term, as compared to other investment options.

How gold reaps profits over time

Gold is a Reliable Store of Value

Owing to its physical properties, gold has historically been considered a store of value. This means that it’s able to maintain its value over time. Since 1900, physical gold has provided the best long-term store of value. In the short term, other currencies might have done better during certain periods, but in the long-term, gold has always been ahead. Though its prices fluctuate, subject to market demand and supply, its value stays intact, preserving your purchasing power, and accordingly works as a hedge against inflation.

The above graph shows how gold stores its value over time, with a continuous increase since 1971.

Gold is available in limited reserves and does not erode over time, which adds to its intrinsic value. Not all commodities enjoy this feature. It brings stability to investment portfolios, and that’s why it is seen as somewhat of a safe haven for investors. During times of economic downturn or financial crises when other assets perform poorly in the market, gold does well because investors flock to invest in it, and is able to offer protection against devaluation.

Gold can be Easily Liquidated

Liquidity, in the economic sense, refers to the degree to which an asset can be easily and quickly sold, bought, and converted to cash. Among all the investment assets, Gold is considered a very liquid asset, not to mention that it always maintains its intrinsic value.

Being one of the highly demanded commodities, Gold, as well as other precious metals, can easily be sold. You don’t even have to sell all your investment at once, as is the case with real estate units, or abide by a certain date to liquidate your investment as is in banking certificates of deposits.

Another matric that makes gold a high liquid asset is the bid-ask spread, which means the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. Gold bullion usually tends to score a low bid-ask spread, a thing that makes it one of the most liquid assets.

Why You Should Add Gold to Your Investment Portfolio?

Portfolios often consist of diversified options including gold, bonds, stocks, and currency. With the negative correlation among these assets, if one asset is not performing well, the other would be doing the opposite and the investor would be losing all their capital at once.

Prior to the pandemic, financial advisers encouraged investors to invest in small amounts of gold in addition to other options instead of investing just in gold, for better returns. You don’t want to put all your eggs in one basket.

However, with the pandemic, the recommendations have changed. Egyptian Businessman, Naguib Sawiris encourages individuals to include a substantial amount of gold in their investment portfolio.  According to his recommendation, gold should make around 25% of one’s investment portfolio.

The global economy has taken a severe hit because of the pandemic and thus advisers are encouraging investors to increase investment in gold as it is a safe investment asset. You can invest in physical gold or try out digital gold trading if you are looking for a convenient and timely investment.

Gold investments really pay off in times of high inflation because the more the costs of living increase, the more gold prices tend to rise. And since gold is seen as a good store of value, people will rush to invest in it when they feel like their own currency is losing value.

Since no investment is 100% risk-free, the ultimate goal of any investor should be to diversify his/her portfolio since this helps to mitigate the risk to a certain extent. Adding gold to your portfolio is a great way to keep your investments safe.

Although investing in gold is low-risk, you should always take active measures indicators, and also the effect of global events in the gold market, so timely decisions can be made.

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