Most retirement plans are oriented toward building a portfolio of stocks, bonds, mutual funds, and real estate. However, one asset class that is always trusted, especially during economic uncertainty and inflation, is gold.
For hundreds of years, gold has been a reliable safe haven for preserving wealth, and its role lately has been pretty significant in retirement planning. It is considered crucial to secure your future during retirement. Here is why it is considered a safe and secure investment option, and the new Gold investment options in India.
The Appeal of Gold in Retirement Planning
The following are the reasons why gold has remained a retirement asset:
• Wealth Preservation: Unlike paper currencies, gold’s value has nothing to do with the government or any central bank. Historically speaking, it indicates that gold beats inflation and isn’t dissipated over time. Hence, a gold investment helps many retirees to survive amidst inflation, which affects their savings and fixed-income investments.
• Diversification: A diversified portfolio can protect you from the volatility in one asset class. The investment in gold may prove beneficial during a stock market downturn or an economic crisis in balancing risk. The correlation of gold with equities and bonds is quite low, meaning that it tends to act differently when the other assets are trouble-prone.
• Liquidity: Gold is one of the most liquid assets in the world; hence, retirees can easily buy or sell gold in times of need post-retirement, making it an accessible store of wealth. Selling physical gold, gold-backed ETFs, and many other gold investment products is not too difficult to cash out from.
• Safe Haven: Gold has traditionally been a great “safe haven” investment during political instability, economic downturns, or financial crises. Which means, during time of crisis, especially when the stock market is crashing and currencies are going down, gold tends to rise and is not influenced by market pressure easily. So for retirees, gold will bring peace of mind and security.
The Case for Gold in Retirement Portfolios
• Hedge against Inflation: Inflation is one major threat to retirement savings, as in the long term, inflation erodes the buying power of the money, while fixed-income investments, such as bonds, have their buying power lost in real terms. But gold tends to do very well during inflationary periods. For instance, during the global financial crisis of 2008, the price of gold shot through the roof because of what was going on within the world’s central banks—injecting money into economies to boost growth—and inflationary worries were being raised.
• Retirement Income Protection: Gold can help ensure stable retirement income. As interest-bearing investments and dividends are popular sources of retirement income, these retirement income streams are uncertain and are especially sensitive to the level of interest rates. Holding gold decreases the need for interest-bearing investments, allowing investors to enjoy a more balanced, resilient income strategy.
• Capital Appreciation: Gold has traditionally been an asset that has accrued long-term value. Gold does not yield income in the form of dividend yields or interest payments, but it can generate capital appreciation. For example, in the last ten years (2010-2020), the gold price increased dramatically, from around ₹18,000 per 10 grams in 2010 to over ₹49,000 per 10 grams by 2020 in India, making it a long-term investment gain.
Gold Investment Trends in India
India is one of the largest consumers of gold in the world; it is perceived as a store of wealth and an investment in the context of retirement planning, and many Indian households’ portfolios contain large chunks of gold. In the past few years, quite a few gold investing options have emerged in India that reflect the growing importance of gold as a savings medium for retirement plans:
• Gold ETFs and Sovereign Gold Bonds (SGBs): Other than physical gold, Indian investors are also now keen to focus more on financial gold instruments like Gold exchange Traded Funds and Sovereign Gold Bonds. These instruments allow investors exposure to gold without taking ownership in the physical form. SGBs, apart from carrying interest on them, can act as a future, long-term investment avenue for investors intending for retirement planning as well. As Sovereign Gold Bonds issued by the Government of India, they carry 2.5% annual interest along with potential capital appreciation in the gold price.
• Digital Gold: There is a rising popularity among investors to invest in digital, especially the new-age investors of India. One can purchase small parcels of gold online with the help of platforms such as Paytm, PhonePe, and Google Pay, making gold investment much more accessible and convenient for people who want to start investing in gold, though small, but add up their gold holdings over time, which is perfectly suited for long-term retirement savings.
• Hedge Against Rupee Depreciation: India has seen the Indian Rupee consistently devalue against major currencies like the US Dollar. As gold is priced in dollars, it is an effective hedge against the volatile Indian Rupee depreciation. Hence, many Indians today are using gold to hedge against rupee devaluation of their wealth, especially following the global economic shutdowns like the COVID-19 pandemic.
• Gold Prices: Gold prices in India have gone up on many domestic and international fronts. In the current calendar year 2020 and 2021, gold prices rose to unprecedented levels as fear of pandemic loomed large, along with global monetary stimulus and building concerns on inflationary lines. Till date, the gold prices are at strong points but with constant waves of fluctuations according to prevailing global market trends. The ascending trend has made gold an attractive investment medium for long-term retirement purposes.
Practical Ways to Invest in Gold for Retirement
• Physical Gold: It includes coins, bars, and jewelry. While physical gold has traditionally been a means of preserving wealth, it has storage costs and security issues associated with it. Many retirees would like to put a portion of their retirement fund into physical gold, but this must be weighed against other investment avenues.
• Gold Mutual Funds: Investors can also invest in gold through mutual funds that pool money to invest in gold ETFs or gold mining stocks. Mutual funds have the benefit of offering exposure to gold without having to actually put money directly into it and having the metal actually on hand.
• Gold ETFs: Gold ETFs will allow investors to buy gold in paper form rather than holding the physical metal. A Gold ETF is listed on the stock exchange, so their prices are reflective of real-time changes in the price of gold. Therefore, its allocation for retirement planning is something very convenient and transparent.
• Sovereign Gold Bonds: These bonds, which are backed by the government, enable people to invest in gold and earn interest on their holding. SGBs are ideal for investors seeking a safer, income-generating gold investment, in particular for retirement planning.
A Golden Opportunity for Retirement
Gold has always been a fundamental element in retirement planning, but more so with time. Whether one holds physical gold, ETFs, or government bonds, retirees will find gold a commendable means to invest for safety, hedge against inflationary pressures, and diversify their portfolios.
In India, gold remains the popular asset class for retirement savings and is getting easier to incorporate into any long-term financial strategy because of some trends, such as digital gold and sovereign gold bonds. With all investments, it will remain important to evaluate one’s risk profile and review with a financial advisor to make sure gold is a good fit for one’s retirement plan.
Investing with gold in your golden years guarantees that you are investing your golden years in protection and hence will allow you to enjoy the peace of mind a diversified and resilient portfolio brings.
The author is the CEO of Precious Metals Business, Muthoot Pappachan Group