Gearing up for recession? Don’t forget to buy gold
Bad news: Recession is here.
Good news: Gold could help you get through it
We give you 5 reasons why.
In times of recession, counterparty risks in paper assets like bonds tend to increase. Gold, on the other hand, cannot default, go bankrupt or fail to carry out its end of the deal. Its value is retained in spite of the recession as it is backed up not by paper promises but by inherent value.
Unlike equities, gold does not require a business to keep it afloat. Gold’s value isn’t dependent on revenues and profits. This makes holding gold imperative during an economic downturn when stocks are hit by losses due to a deteriorating economy.
As central banks cut rates to facilitate flow of credit into the system and reignite economic activity, your fixed-income instruments will yield lower or reprice at a lower rate of interest. This reduces the opportunity cost of holding gold, further increasing its attractiveness as an asset class in a low-yielding recessionary environment.
Central banks are injecting liquidity with their bond-buying programs to dodge a system-wide collapse and boost economic activity. With too much of this easy money floating around, there is a probability of higher inflation over the next few years, lowering the purchasing power of the currency you hold. In contrast, gold is a reliable store of value as it cannot be printed or created at the discretion of central banks.
Gold benefits from economic distress and crisis as people shun risk assets and flee to gold’s safety. The asset class thus attracts more flows, and this momentum, in turn, ensures further gains.
Gold is thus an ideal asset class to help your portfolio get through a recession. Go ahead and buy the metal, if you haven’t already.
Given the nationwide lockdown, there are restrictions on the movement of people as well as non-essential goods. This could make it difficult for you to go about sourcing physical gold coins and bars for your investment needs. But you can always choose to increase your much-needed allocation to Gold via the Gold Fund route. Rather, this is indeed an opportunity to shift towards an efficient way of buying gold through Gold Funds where units are backed by physical gold holdings of 24 Karat. They are well regulated and continue to operate despite the lockdown, becoming a preferred way to invest in gold as you can sit in the safety and comfort of your home and buy and sell gold as and when you want.