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8 Ways Gold Is Put To Use - Outside View by PersonalFN

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8 Ways Gold Is Put To Use
Jun 2, 2014

We all know gold is a precious metal. But in the world of investment, gold stand to be a significant asset class. Moreover it is also important for retail investors. In this article, we highlight the various uses of gold and how you as an individual can make the best use of your gold holdings.

  • Store of Value: Gold is a long-lasting metal, which can last for ages. It being a precious metal has been used for exchange and has lasted as money for centuries. As governments in the developed nations have ability to increase the circulation of their paper currency by printing more money, which in turn reduces its value; the circulation of gold can be increased only through mining which is not an easy task for Government. And hence gold retains its value better as compared to paper currency.

  • Reserve Currency: Having store of value, the central banks and government of various nations aim to maintain gold reserves in order to secure their position. The central banks use these reserves as a guarantee to cash in their promises and pay their depositors and note holders.

  • Hedge against economic pressures: Gold being a precious metal is also used as hedge against financial distress like inflation, deflation and currency devaluation. Due to frequent changes in the supply of money in the system, the value of currency can inflate or deflate. Hence holding gold can help one hedge such risk of devaluation of money which might be lying in their bank accounts and lockers.

  • Industrial demand: Though not as high as silver, gold has some industrial demand too and is being used in thermal and electrical conductors. Apart from this gold also has some medical and dental use too.

  • Jewellery / Ornaments: In terms of volume, India is one of the largest consumers of gold. People in India have special fascination and emotion for gold. They buy gold especially in the form of jewellery on auspicious occasion like marriage, festivals and social events. Many Indians, like to hand down their gold to the next generation in the form of jewellery and ornaments. The change in design and fashion can however be taken care by jewellery recycling, where old gold ornaments can be used to melt and form it into new ornaments.

  • Investment: Purchase of gold jewellery may not always be termed as investment, as people hardly sell their physical gold jewellery and booking profits when prices go up. Conventionally for investment purpose, people prefer to buy gold bar and coins in physical form. Though gold bars and coins may not have social use, it can still be used as a long-term asset and also liquidated during any swift up move in gold prices.

  • Portfolio Diversification: Gold is termed as a hedge against inflation as it has ability to take care of currency devaluation. In conditions where productive asset classes like equity, debt and real estate investment face the risk of losing value, due to fall in currency value, gold can come to rescue. Also if these productive asset class are unable to adequately compensate individuals with inflation adjusted returns, then demand for precious metals like gold tend to increase. Hence it is recommended to hold a slight portion of one's investment portfolio in gold to diversify such risk across asset class.

  • Pledging for Emergency Needs: Many banks and gold financing companies have started offering secured loans to individuals, who wish to pledge their gold at a reasonable interest rate, for a pre-specified tenure. The interest on such loans is lower as compared to personal loans. So, gold can be instead used for raising short-term finance upto 80% of the gold's value, for a nominal rate. Individuals with gold lying ideal in their locker can pledge their gold to meet their short term financial needs. Thus it is not necessary to sell your gold to raise money in case of emergency.
Keeping in mind the above points, you can use your gold efficiently.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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