Why people invest in Gold during recession and why is it considered safe?
Investors in India and around the world consider investing in the gold safe during the recession. When the world is suffering from an economic crisis due to the coronavirus pandemic, there is a hike in gold prices. This is due to the demand and supply factor. It must be noted that whenever there is recession or slowdown or depression in the economy, gold prices hike as they are considered to be the safest mode of investment by the investors.
Whenever there is a rise in GDP, the gold prices go down a bit but if there's a recession, prices of gold increases due to the huge demand and supply. Investors invest in gold rather than the stock market as the companies will go in the loss at the time of recession. Thus, to secure their investments, investors consider gold as the safest method. Example: Gold in India per 10 gm was priced at 30,000 INR a few months ago, but after the global pandemic the gold prices have crossed 47,000 INR.
Reasons why gold is seen as a safe investment:
1- When there is a rise in GDP, investors invest in bonds to raise maximum profit from their investments. However, investing in gold is preferred as there is no bond or paperwork involved. Also, gold is a commodity itself. For Example: If you invest in a company say 'A' and the investment to be 1,000; you will receive a fixed amount of profit from the company every month. However, at the time of recession or depression, there are chances that the company will go in loss first and may go bankrupt. Once the company is bankrupt, your investment is at risk as the company may cancel the bond.
2- When the GDP is growing positively, investors invest in shares of the company as the profit directly depends upon the rise in shares of the company. However, at the time of recession, shares of the company go down. Example: A few months back, the Sensex value was approximately 40,000 but it went down to 25,000 amidst the pandemic. This clearly means that when GDP contracts, people invest in safer options. It must be noted that the value of Gold is independent as it is a commodity itself. Therefore, Gold is considered as the safest option to invest during the recession.
3- Whenever GDP rises, investors invest in fixed income methods such as PPF, savings deposit, etc. to gain a fixed amount of interest on the investments made. However, during the recession, the central banks of the countries (RBI in India) lowers the repo-rates (currently, it is 4.4% in India). This means that the investors will get lower interests on their fixed income deposits. Thus, gold is again considered as the safest asset during the recession.
4- Many people who do not invest anywhere and have the habit of keeping cash are prone to inflation. For instance, if you have 500 rupee-note and you neither deposit it in the bank nor you purchase any asset, the purchasing power of the 500 rupee-note will automatically go down after a few months due to the inflation. This is because during the recession there is a lot of cash in the economy which increases the liquidity in the markets and thus the inflation.
It must be noted that due to the above-mentioned reasons, investors invest in gold to curb their economic distress during the recession. This, in turn, increases huge demand and supply of gold. The prices of the gold rise due to the high demand for the metal and investors invest in it to get the maximum profit.
The Government of India has launched the Sovereign Gold Bond Scheme and the investors will get a fixed interest rate of 2.50% in six tranches from April 2020 to September 2020 annually. Government has launched this scheme as India is under countrywide lockdown and people cannot invest in physical gold.