The relationship between economic downturns and gold

The Covid-19 pandemic has roiled the global economy. What started as a health crisis has quickly turned into an economic crisis. Countries across the world have placed restrictions on movement and gathering of people to slow the spread of the virus. With businesses shut and economic activity declining, most of the investment assets have been negatively impacted. 

Equity markets have been volatile due to the uncertainty around the overall impact of Covid-19. While weak consumer sentiment and limited liquidity has choked the real estate market, the rising risk of defaults has pushed the debt markets into turmoil. In contrast, the value of gold has been rising amid the health and economic crisis.

Gold and economic downturns

When you invest in normal times, the objective of the investment is generating returns with manageable risk. However, during an economic downturn like the one due to Covid-19, the investment aim changes to capital preservation and liquidity. Gold is considered to be a good store of value, which has made it a safe haven investment. Investors flock to safe-haven assets during economic uncertainty. The value of gold has risen during an economic downturn and political instability on most occasions and the Covid-19 crisis may not be different.

In the early 2000s, a number of economic and political crises took place. In 2000, the US stock markets collapsed, while the World Trade Centre was attacked the next year. These events had a ripple effect on markets and economies, including India, across the world.  In the meantime, the price of 24 carat gold rallied from Rs 4,300 per 10 gm in 2001 to Rs to Rs 8,400 per 10 gm in 2006.

The world faced a financial crisis in 2008 which led to an economic downturn in many countries. In 2008, the value of gold declined initially in line with other commodities as economic activity slowed down. However, the value of the yellow metal recovered quickly as the global economic health deteriorated. From Rs 13,031 per 10 gram in October 2008, gold prices rallied to Rs. 18,122 per 10 gm in December 2009. Gold prices continued to rise unabated till at least September 2011 as central banks across the world became net buyers of the precious metal. Gold investors in India gain additionally during an economic crisis as the value of INR generally depreciates against the US Dollar, which positively affects gold returns. 

Gold investments

The value of gold cannot collapse to zero due to a high intrinsic value. It is a physical asset and can be liquidated easily, which makes it an ideal investment during an economic downturn. Storing gold can, however, be a cumbersome process. With the development of the financial sector, you can invest in gold-related products rather than actual gold.

Gold funds are an excellent product to invest in the yellow metal. With gold funds, you can enjoy the flexibility of mutual funds and the safety of gold investments. The value of gold funds increase or decrease in line with the actual value of gold. With Moneyfy app by Tata Capital, you can invest in top-rated gold funds without any hassles.

Additional Read: Why Gold is a Safe Investment Tool in an Economic Crisis

Investing in a gold fund gives certain advantages as opposed to physical gold. Some of the advantages are:

I Security:

No need to spend a penny on the security of the investment in the case of gold funds. If you buy physical gold, you will have to invest in a secure holding place.

II Diversification:

Gold funds help you diversify the investment on multiple levels. One can diversify his/her overall investments and reduce market risks by investing in gold funds.

III Multiple options:

Besides investing in physical gold, gold funds also invest in entities involved in the gold value chain like producing and distributing companies, thus diversifying the investment further.

IV Flexibility:

Gold funds offer greater flexibility as you can invest any amount as per your convenience. On the contrary, physical gold is generally sold as bars of fixed weights like 5 gm or 10 gm, which requires you to invest a certain amount of money.

Gold funds are highly liquid investments and can be easily redeemed. Without the hassle of visiting physical stores, you can redeem your investment from the comfort of your home through the Moneyfy app from Tata Capital.

Conclusion

Gold performs better than other assets during an economic downturn, making it a must-have in your portfolio. The weakness in the economy increases the counterparty risks in paper assets like bonds, but gold’s value remains stable. Similarly, equity markets decline as revenue and profit of companies get affected, but the value of gold is inherent. These unique advantages provide gold with an upper hand during economic downturns like the one induced by Covid-19.