Your Money: Invest in gold this year to hedge against inflation

Inflation is affecting economies all over the world. The International Monetary Fund (IMF) estimates that contraction will happen in more than one-third of the global economy. However, the Indian economy is being resilient but the battle against inflation is not yet over. It is important for investors to invest in those asset classes which can deliver returns higher than that of the inflation rate. One such asset class is gold. Let us discuss the same in detail.

Good hedge against inflation and recession

Gold is considered a smart way to fight against inflation because it tends to hold its value and preserves your purchasing power over the long haul, despite fluctuations even in the currency. New year is a good time to increase allocations to gold.

Empirically, over a longer period of time, it has been proved that gold has been a good hedge against inflation. When an economy slumps into a recession, the stock market also slows down and real estate investments can also possibly lose value during that time. In such a scenario investing in gold can be a good way to ensure a diverse portfolio and thus reduce your exposure to these riskier assets, and minimise the impact of any losses.

Also read: Is overdependence on passive investing detrimental to portfolio health?

Central banks likely to buy more gold

Gold plays an important part in central banks’ reserves management system. Sensing the uncertainties and associated macroeconomic risk, most of the central banks including RBI are likely to continue to buy gold in 2023 and increase the holding as a percentage of their international reserves. The uncertainties surrounding growth expectations for 2023 make a case for investing in gold.

The fact is that unlike financial assets, gold is a real asset which involves no credit risk or counterparty risk. Gold yielded positive double digit returns in 2019, 2020, and 2022, in 2023 as well, one can expect gold to do well. Therefore, investors should approach gold strategically.

Type of gold…

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