Gold, which has always been considered a hedge against inflation, has been weighed down recently as central banks all around the world increased interest rates to fight against inflation amidst a surge in the US dollar. What does this mean for the future of gold investing? Is it better to invest in the share market instead? This article elaborates on the difference between the two asset classes, Gold and share market and examines how investors can choose the best option per their needs and market conditions.
Both gold and stock markets are known to be cyclical and usually go through a lot of ups and downs depending on various market conditions. However, both these asset classes display an inverse relationship with each other, i.e. the price of gold rises when the stock markets are performing poorly and fall when the stock markets are doing well. It also explains that the investors tend to focus on one of these assets when the other isn’t performing well.
When is gold a better investment option?
Traditionally Indian investors have always liked gold – especially investing in its physical form. You may even open Demat account online to invest in gold. It facilitates investing in gold stocks, gold certificates, and gold ETFs. Investors choose to invest in gold under the following circumstances:
- The stock markets are performing poorly, and investors are looking for stable returns.
- The investor has limited or no knowledge of the stock markets and company valuations.
- The investor is bullish on gold, and a comparative analysis with other asset classes justifies the belief.
When is the share market a better investment option?
Investors prefer stock markets over gold under the following circumstances:
- The macro and micro indicators support the stock markets and are expected to provide higher returns than gold.
- Investing in physical gold can carry additional risks and store costs, and investors are looking to eliminate both the risk and associated costs.
- Gold does not pay any dividends or compound over time. This can be a compelling factor to prefer stocks over gold.
While what to invest in requires a lot of expertise, the actual process of investing has been made easy with the advent of mobile technology and online Demat account. There are various advantages of Demat account such as being able to invest from anywhere and not being required to hold a physical copy of the share. However, while investing in company shares can look very attractive, it requires a good understanding of the share market and how it works. Investing without proper knowledge of company valuations and the ability to match the current economic and political scenario may lead the investor to incur losses.
Gold as a hedge for stock market investments
There is a scenario when the investors look to invest in both these assets simultaneously. Gold investments are often used as a hedging technique against the stock market investment, given the continuous demand for the precious metal.
While investing in gold is often termed as “safe”, it is misinterpreted as an asset that provides maximum returns. Before making a choice, investors should be aware of the different asset classes available in the market and the kind of returns they provide. Making the right investment decision requires a thorough analysis of the market – this includes analysing past trends, understanding the current scenario, and estimating future trends. While some investors are well-equipped to carry out this analysis independently, some prefer to rely on their investment advisors. Both these approaches can help you pick the better investment option between gold and stock markets per your requirement and investment time.