Adding gold to your investment portfolio can diversify it and protect against inflation. However, it’s important to consider your goals and risk tolerance before making a decision.
There are many ways to invest in gold, from buying physical bullion to trading futures and options contracts. The most convenient and cost-effective way to gain exposure is through exchange-traded funds and mutual funds that track the price of gold. Find out more at should i invest.
Safe Haven
Gold is considered a safe haven because its price does not fluctuate much during periods of economic turmoil and it is not affected by interest rates. It is also a physical commodity, meaning that it can be easily liquidated. This makes it a popular choice for investors as an investment in times of financial crisis. Investors who buy gold often do so as a form of insurance against potential losses in their other investments.
Research on the role of gold as a safe haven has provided mixed results. One recent study used intraday data to examine the impact of the COVID-19 pandemic on market dynamics, including a flight-to-safety behavior. The authors found that gold’s safe-haven effect was strong during Phase II of the pandemic, but that it was weak during earlier phases. The authors also found that hedging costs significantly increased during this period. The findings of this study have practical implications for investors and should inform their strategic allocations of risk-adjusted portfolios.
Diversifying
Gold is a tangible asset that cannot be devalued like paper money, which is why it is often used for diversifying investment portfolios. However, it is important to understand the different types of physical forms of gold and their additional costs and liquidity repercussions before making any investments. For instance, jewellery is not an ideal choice for safe haven investing as it has higher prices than the value of the metal and comes with the cost of craftsmanship.
Recent research using GJR-GARCH estimation results has shown that gold performs as a safe haven during Phase I of the COVID-19 pandemic but loses this function in Phase II (Cheema et al, 2022). However, the current analysis is limited to only one phase of the pandemic and needs further work with data at a higher frequency. Future research could also look at the performance of other assets such as currencies, stocks and oil. This would allow for a more comprehensive understanding of the effects of the COVID-19 pandemic on strategic allocations of financial markets.
Reliability
Gold’s reliability makes it a popular choice for investors in times of economic uncertainty. Its value is not influenced by currency fluctuations, geopolitical instability or inflation. It is a tangible commodity, making it easy to store and transport. It is also a good option in the event of a global recession, as it can provide an outlet for those who lose confidence in government currencies.
Gold also has a low correlation with other assets. This means that it can outperform traditional investments during periods of economic adversity. This is particularly true during recessions, but gold can perform well even outside of these events.
Although gold is a valuable asset, it should be used in moderation. It is not a reliable income-producing investment, so it should only be a small percentage of your overall portfolio. However, it can help reduce the risk of a volatile stock market by adding diversification to your portfolio. You can also purchase gold in the form of shares in a gold mining company, which may give you greater control over your profits.
Taxes
While adding gold as an investment asset can boost diversification, it does bring tax implications that investors need to consider. Physical gold investments like bullion and coins, for example, get taxed differently than other investment types. The IRS considers them collectibles and taxes them at a maximum rate of 28% when sold. This is higher than long-term capital gains rates on other investments.
In contrast, paper gold instruments such as ETFs and mutual funds are treated the same as other investments. Income on the sale or redemption of these instruments is taxed as short-term capital gains, depending on your income slab.
Investors who receive gold as gifts from blood relatives are exempt from taxes on these assets. However, they must bear taxes when they sell inherited gold assets as per LTCG and STCG norms. Keeping detailed records of coin purchases and sales, and consulting a tax professional can help minimize your tax liability. Investors can also offset their gains with capital losses to lower their taxable income.