Investing in gold is considered to be the best way to reduce the impact of stock market losses and inflation. Gold has its own importance in India and it also has a significant market. It falls in the important asset class due to facilities like liquidity and returns. It helps in reducing the losses from stock market fluctuations. Therefore, it is often advised by financial experts to invest in gold to diversify the investment portfolio. If you invest in gold, it can be beneficial in times of inflation. So through this article we are going to tell you how it helps in fighting inflation.
Equity gold investment is one of the best ways to reduce the impact of inflation (inflation). As you know, cash reserves are the most risk averse investment during inflation. The purchasing power of cash decreases during inflation and the probability of the performance of equity investment during inflation increases as compared to earlier. In addition, inflation can also affect the returns of other financial assets.
For example if you have deposited money in fixed deposits at an interest rate of 6% per annum and inflation in the economy is 8% per annum, then the rate of return cannot help reduce the effects of inflation. Investment options associated with stock markets are more likely to fall during inflation. High inflation reduces the speed of the economy and it damages the GDP of the country. On the other hand, high inflation is more likely to increase demand for gold bullion and physical gold, as inflation has less impact on these options than others.
Why buy gold during inflation?
Gold is not only the main tool for traditional investors who invest in it to accumulate money, but modern investors also place it well in their investment portfolio. The value of gold is recognized worldwide and the liquidity available in its investment attracts all types of investors. Also if we look at the past performance of gold, we will find that it has always been a safe investment option during the uncertainty of the stock market. Demand for physical gold is always high. Since gold is a luxury metal, the price of gold rises when the prices of essential commodities for living increase. This is usually due to inflation.
For this reason, gold is an excellent option to reduce the effects of inflation and it often provides investors protection during stock market volatility and economic turmoil. Gold in India has been performing well and giving good returns to investors. Currency depreciation can also be reduced by investing in gold. The World Gold Council report shows that when there is a 1% increase in inflation, the demand for gold in Indian markets increases by 2.6%. Let us now try to know how inflation affects different asset classes –
Equity – When inflation is high in the economy, the central bank hikes the interest rate to reduce cash flow in the economy. Such measures are implemented to bring inflation under control. As a result, lending capacity of most firms is affected. This affects their profit and thus reduces share prices in the stock market.
Currency – The purchasing power of local currency decreases as a result of high inflation. That is, the price of the currency falls.
Bonds and Fixed Deposits – Higher inflation leads to higher interest rates and consequently lower bond prices.
Commodity – As inflation rises, commodity prices rise and this reduces the purchasing power of money.
gold – It is best to invest in gold at the time of inflation. It has historically performed well and is likely to grow in demand in the future. It has been performing well due to limited supply. The relationship between demand and supply determines the price of any commodity and thus gold has maintained its price despite the fluctuations in the market and the fall in the value of the currency.
This is the reason why traditional investors prefer to invest in gold, as there is very little fall in its value. If seen, the value of gold is continuously increasing with time. Since gold is a precious metal, its value depends not only on the cost of production, but also on global development.