InvestorQ : Will gold as an asset class ever go out of fashion?
Abigail Ghoshal made post

Will gold as an asset class ever go out of fashion?

2 years ago

There are a variety of reasons why gold has never gone out of fashion and perhaps will never go out of fashion. Here are a few key reasons why gold continues to retain its lustre and allure after the passage of centuries…

Every piece of gold mined since the beginning of history continues to remain in some form or the other. In a nutshell, gold is indestructible although the form can change and can be recreated over a period of time. It is this indestructible quality of gold that proffers gold this special status.

Gold has traditionally been a good hedge against inflation. Businesses may come and go and financial instruments may or may not retain value. But gold, despite all its erratic movement has managed to at least protect you against inflation over a longer period of time.

Gold can be bequeathed across generations. It is quite common to find Indian women wearing or owning jewellery that has been passed on to them down the generations. In traditional marriages and other auspicious functions, gold forms the perfect way of transferring wealth down the generations, especially to women who may not enjoy the same rights to property and other assets.

Gold is a preferred asset owned by most central banks. Be it the US gold reserves in Fort Knox or the Reserve Bank of India or the Bank of China, gold continues to be a preferred asset for storing value. Till 1971, the world operated on a system known as the gold standard. Central banks could only issue currency to the extent it was at least proportionately backed by gold.

Gold has limited and finite supply. Anything that has infinite supply tends to lose value over a period of time. Since 2008, global central banks have been liberal in printing currency which has devalued most currencies substantially. You do not have that luxury with gold since the supply is finite. That automatically builds a certain amount of macroeconomic discipline and that explains why gold has retained value over the years.

Gold has globally been accepted as an alternate currency. You can use and monetize gold in any part of the world. Of course, there could be differences in purity (defined by carats) but you at least have an asset class that is globally accepted. This global acceptability is one of the main reasons why most central banks even today prefer to hold some part of their reserves in the form of gold.

Gold is tangible and that is an extremely important consideration in a country like India. Indians distinguish gold from financial investments in the sense that gold can be seen, touched and felt. That gives a greater degree of comfort and a greater sense of security to individuals.

Lastly, Indian households are estimated to be holding over 900 tonnes of gold valued at a little over $1 trillion. The reason is that the Indian government has allowed households to possess a certain amount of gold without worrying about the taxman. Hence for middle class households, it becomes the safest and surest way to store wealth and that largely explains the allure of gold.