Deep, deep dive
What do you need to understand before investing in gold?
How is gold valued?
Gold is valued based on supply and demand. The more the demand, the higher the price and vice versa.
Is gold a good investment?
To answer this question, let’s break it down into two parts.
- Short term investment
(Source: World Gold Council)
If you look at the price historically, from the 1980s to early 2000s, the price of gold mostly stayed the same. That’s about 40 years with not much change in its price! It then began rising from 2004, taking another eight years to reach a high in 2012 before falling again. The price of gold has now reached another high now in 2020, marking another eight years since its previous record price.
In the short term, the price of gold goes up and down a lot making it an unstable investment. But if you are willing to take on more risk, you may be able to make money. However, with the higher risk, there’s a chance you could lose some of your money.
- Long term investment
Although past performance should never be used to predict future trends, the price of gold over the long term has shown that the gold price has gone up a lot over the last 50 years (that’s a long time). One disadvantage of holding on to a gold investment for the long term is that it doesn’t give you dividend income. The only way for you to make money from gold is by selling it. Other investments like certain stocks on the other hand, pay dividends, so you will be able to enjoy the dividend income while still holding on to your investment.
Why do people invest in gold?
Historically, people invest in gold in the following situations:
- Low interest rates
Usually when the interest rates are low and your returns from Fixed Deposits are low, people tend to invest in gold as they think it would give better returns.
- Economic uncertainty
When the economy is uncertain and people start to fear, or when the currency might get affected, people tend to invest in gold.
- Market corrections
Market corrections is when the stock market starts to fall after reaching its peak. During this period, when people start getting fearful of losing in the stock market, one area that people may look into is investing in gold.
Are gold investments Shariah compliant?
Gold investments are Shariah compliant if it fulfils two main criteria:
- The investment is backed by physical gold.
- The buying and selling of physical gold is done within the timeframe defined by the World Gold Council and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).