Investing in a precious metal during an economic downturn or crisis may bring you benefits. The gold market in Malaysia has grown over time, even during a recession, making it safe for you to consider gold as a valuable investment. But what are the factors you need to consider before investing in gold? Read this article to find out.
In these turbulent economic times, it’s natural for investors to feel worried about their investments especially as traditional investments such as stocks tend to be more volatile during a recession.
The uncertainty caused by the global pandemic has heightened investors’ fears, many of who are now looking into recession-proof ways aka “safe-haven assets” to store their cash, like Bitcoin and gold.
"Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But, you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid, you make money, if they become less afraid, you lose money, but the gold itself doesn't produce anything,” Berkshire Hathaway CEO and renowned investor Warren Buffet once said about gold.
What’s more, gold has seen some bull runs of sorts over the last couple of months - despite the existence of a pandemic, but what could be driving it?
(Image source: Dr. Desmond Chong)
“The reason behind the bull run is similar to any other commodity - it’s because it moves inversely and against the share market like bonds and interest rates, where one goes up and the other goes down,” Dr Desmond Chong Kok Fei, deputy president of Malaysian Financial Planning Councils told CompareHero.my.
The uncertainty and underperformance of certain stocks, and the fact that gold is a liquid asset, has also made gold more valuable during a recession.
Related: What Should You Invest in During a Recession? An Expert Weighs In
The potential of gold - will its bull run continue or are we at the last stage of a gold rush?
Gold’s value is currently at its highest, though still fluctuating, said Chong. Last we checked, it’s worth RM253 at the time of writing.
At the end of the day, the sustainability of gold depends heavily on the market’s confidence, Chong said, adding that many view gold as a more secure and stable investment asset compared to other asset classes because there’s lower chances of manipulating the element, and it’s not speculation but a real type of investment.
“Many people believe in gold because it minimises speculation and manipulation,” he said. “For example, if you say you have 10kg of gold, then you must be able to produce it.”
But first - why is gold valuable?
Some believe that gold holds no intrinsic value, and is essentially just a “barbaric relic”, only worthy as a material to make jewelry. But on the other end of the argument, are people who stand by the idea that gold is an asset with various intrinsic qualities, and it’s these qualities that make it a must in an investor’s portfolio.
We did some research and found that from an elemental perspective, gold’s qualities make it the most obvious choice for a medium of exchange for goods and services. For one, it’s abundant enough to create coins but rare enough that not everyone can produce them, giving it a scarcity factor.
At the same time, gold doesn't corrode, making it sustainable. The fact that societies and economies have placed value and trust on gold, perpetuate its worth. So in good or hard times, gold will always have a value.
“What gives gold its value is the fact that there’s a limited supply of it around the world,” Chong said. “When something is scarce in supply it means it creates supply and demand. For example, like property or land - there’s only so much land. It was also used as a form of exchange by our ancestors. But most importantly, people hold trust and believe in gold as an asset.”
Related: Should You Invest Via Robo Advisors In Today’s COVID-19 World?
The big why - the six reasons you should invest in gold
A key factor that makes gold stand out compared to other investment assets, is due to it being widely considered an inflationary hedge. This means it won’t be affected by inflation. For instance, if the U.S. dollar loses value from the effects of inflation, gold tends to be more expensive because it protects (or hedges) it against the falling dollar.
Additionally, unlike paper currency that needs to be printed to generate more supply - and likely result in inflation - gold is scarce, helping maintain its value over time.
Other than that, the value of gold will also only continue to increase over time as it has always been recognised as a way to pass on wealth over generations. Click here to see how the value of gold has increased over the last 30 years across different countries.
The value and price of gold has only continued to grow! (Image source: Gold Price)
At the time of writing, the average price of a gram of gold is RM253. Compare that to 20 years ago, when a gram of gold cost less than RM50. Imagine how big your savings can increase in the next 10 years if you brought gold today!
Unlike the stocks and bonds that may be more volatile because they depend on the economy, gold is considered a low-risk asset because its value is tied to itself and nothing else - in a sense, there’s always returns.
And what better way to diversify your portfolio by adding another low-risk asset in the form of gold?
Lastly, the advantage of gold is that it’s a universally desired asset. A universal commodity, it usually results in less chaos compared to trading other assets like securities, bonds and currency futures.
But should you invest in gold during a recession?
Before even considering investing in gold during a recession, Chong wanted to emphasise that investors should consider reassessing their investment plans beforehand as a precautionary measure.
|Type of asset||Amount that is already invested (RM)||ROI|
Chong said one could break down their investment portfolio into a table as above
“Gather your investment portfolio papers and list down all current investments. Jot down the percentage and think of the current situation - do you think it (pandemic) will prolong? The importance of this exercise (above example) is to find a benchmark for a hedge - are we beating the benchmark?,” Chong said.
“It’s also to analyse the current financial situation and to assess market performance, and from there you can see whether it’s possible or necessary to start moving assets or portfolios. Or in this case, buying gold,” he said.
Investing in a new asset shouldn't be done on a whim, but after carefully deliberating the pros and cons, as well as knowing what resources you have to allocate for this new asset.
“Let’s say I invest 90% of my investments into the stock market, what will happen next if you are forced to get a pay cut because of COVID-19? You don’t have liquidity,” Chong said, sharing a simple analogy to explain the importance of assessing one’s portfolio.
But how much gold is considered sufficient or too much in one’s portfolio? From our research, we found that experts recommend a portfolio that includes 2-10% of gold. But, Chong said, what’s more important is to understand each asset allocation’s percentage and return, and plan accordingly from there.
“Look at the return, if gold doesn’t give you the best return - let’s say 3% but stock gives you 10%, as an example, then you’re more likely to start moving your portfolio towards stocks,” he said. “Only after preparing a portfolio summary can you see if you’re holding too much or too little. Otherwise you are just a guessing game with your own investments. This is called rebalancing.”
What factors should one consider before investing in gold?
Here’s a quick summary of what you should know before you invest in gold:
1. Investment goal and how much money you have
Check your cash flow to see how much money you can set aside to purchase gold. The money should not include your savings or emergency funds! If you want to divest, look at which asset can be transformed into gold purchase.
Regardless of the goal, the most important thing is to identify the reason why you are getting yourself into this new endeavour.
2. Identify your time horizon
Start with the end in mind. Why would you like to buy gold, and how long will you need for it to grow by a certain percentage?
Knowing how long you will need to invest before you get the desired return is a factor that many investors often forget. If you want to grow your savings by 15%, how long will it take to get there?
3. Risk and return
Never invest in what you are not willing to lose. If you are going to pump in your hard-earned money, better be sure that it is worth it and that you don’t end up losing sleep instead.
Park your money in an investment vehicle that you’re comfortable with, and don’t take chances on things that you have no knowledge about.
Lastly, give yourself a personal finance refresher
Tie it all together by reminding yourself the five important steps you need to tick off your checklist before pursuing any investment opportunity:
- Set a goal
- Gather information on the investment
- Analyse the information: Can you afford it? Is it a real investment opportunity or is it a scam?
- Develop a plan to get there - Come up with an asset allocation plan
- Find a licensed advisor or institution if you need extra help
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