Gold Investment

Gold and Inflation: How Gold Has Kept Its Value

5 Mins read
stopping the blocks from falling by acting as a hedge

When you hear the word “gold,” what comes to mind? For many, it’s images of glistening coins, or a shiny chain worn by royalty. But as more investors turn their attention toward this precious metal — and as the Federal Reserve continues to print money — gold has become more than just a commodity. Today, it’s an asset capable of protecting your wealth against poor economic conditions, inflation and currency devaluation. To learn more about how gold Investment can help protect your finances from inflation in the future, how Gold Investment can be a hedge against inflation, see this article.

What is inflation, and why should you be worried about it?

Inflation is the rate of change in the price of goods and services. It is measured by comparing the cost of a basket of goods and services over time. Inflation is a bad thing because it can erode the purchasing power of your money. For example, if you have ₹100 and inflation is 6%, you will have ₹95 left after a year. But it will have 10% increase in the price of a good you purchased i.e. it adds ₹10 to the value of goods. It’s the same with gold coins. Because your gold is worth less in rupees, we pay more for it as the value of rupee decreases. That means if gold coin prices increase by 10%, you’ll pay more on each coin.

To measure inflation, economist consider a bunch of goods and services that a average person would buy. Weighted average of all these goods and services is taken. For example, this price comes out to be ₹30,000 in year one. The economist will again calculate the price of this basket containing the goods and services, after 5 years. This time the price came out to be rupees 31,800. This means things that cost ₹30,000 in year one, the same things which give you the same standard of living now cost ₹31,800.

How can you prevent inflation from hurting your investments?

Investing in the stock market can be a great way to build wealth, but what happens when the market crashes? Is there anything you can do to prevent your investments from being hurt by inflation? If you’re a serious investor, then you’ll want to protect your investments and hedge against inflation. Inflation is the broad term used to describe a rise in the prices of many types of goods and services. Simple examples of inflation can easily be found around the world on any given day: A cup of coffee that used to cost ₹10 is ₹50; a pair of new sneakers that used to cost ₹500 are now ₹3000.

Inflation hedge

To avoid inflation from hurting your investments you need to invest in inflation hedge. What is an investment hedge? What is the type of investment that will protect against the decreasing purchasing power of money. Examples of inflation hedge are Commodities like Gold, Real estate, appreciation oriented assets.

How can gold protect your wealth?

Comparison of gold prices with inflation rate

Gold is a safe haven asset that’s been around for thousands of years. So how can it protect your wealth? Gold Investment is a good hedge against inflation, and it’s also a good protection against stock market volatility. Furthermore, there are real, intrinsic value in gold. The gold market is headed toward record-breaking levels as investors flood in to buy up the stuff. Between April and September of 2020, gold sales jumped by more than 20% from the same period a year ago. And this surge was largely driven by investors smoothing their portfolios with gold as their main hedge against inflation and uncertain economic conditions.

How can you use gold coins to protect your purchasing power when faced with inflation?

The simple answer is to purchase gold in corresponding proportional amount when you are buying critical goods to balance with the increased value, know when to sell it (and when to buy it back), and store it in an accessible way. For the vast majority of investors, investing in gold and silver (and other assets) will do little to protect you on a macro level, but it’s a great way to differentiate among options at different times in your investing journey. Inflation means you may want to diversify among stocks, bonds, money market accounts and more, and gold and silver can help you diversify. And while gold may have increased in price over recent months relative to the general market, bringing it closer to your rupees’ purchasing power, you can still buy it at a premium today.

What are the best ways to invest in gold?

There are a few ways you can invest in gold. You can buy gold bars and gold coins and bury them in your backyard but that’s not a good idea because it’s too risky (what if you forget where you buried it?), and you’ll have to pay capital gains tax when you go to sell your gold bars or coins later.

Digital gold

To overcome the problems of holding gold coins, at the same time to enjoy the benefits of physical gold, we have Digital Gold. Here you buy gold online which is backed by physical gold. This physical gold is store in safe lockers by the seller. Investments start with rupee 1. Your accumulated gold is delivered in the form of gold coins or you can exchange it to Gold Jewellery too. In digital gold the 24k gold price remains same throughout the country.

Gold ETFs

You can also invest in gold ETFs, which allow you to invest in different kinds of stocks that track 24k gold price movements. Gold ETFs are also called as paper gold. Minimum amount you can buy is one gram gold. You cannot exchange it for physical gold nor you can get gold coins delivered from your accumulated gold.

Gold bonds

Then there are gold bonds which come with 8 years of lock in period. But these bonds pay you 2.5 % interest every year. Minimum amount you can buy is one gram gold.

To learn more in details about different types of gold investments Read here.

Conclusion

Gold Investment can be a hedge against inflation, especially in times of weak or unstable economies. Inflation can cause currency values to fall, which in turn causes the price of gold to increase (thus sending investors running back to their original suppliers of the precious metal). Investors in gold and silver bullion can also use the metal as a hedge against periods of high inflation.

For example, in the 1970s and ’80s, the U.S. was experiencing high inflation, and the Soviet Union had hyperinflation; the former Soviet Union was printing rubles like crazy to fund the central bank. But as Americans built up savings during these inflationary periods, gold ownership skyrocketed. By the time the inflation returned to the U.S., gold holdings had grown and gold prices skyrocketed again. Investors used gold as a way to protect their portfolios against periods of inflation. Investors have also turned to gold as a way to hedge against currency devaluation.

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