In old Bollywood movies, gold has been typically projected as a last resort in situations of extreme financial distress. The traditional belief that gold stashed away in lockers can come for financial rescue in critical times is ingrained in Indian mindsets.
During the initial uncertain period of Covid lockdown, I received few queries on gold. These were mainly about should one buy gold to be used in emergency.
It is true that gold is considered to be a safe asset during times of economic and market turbulence.
Let us evaluate how gold stands as an asset class if considered to be part of an emergency fund.
Firstly, the 2 most important aspects of an emergency fund are liquidity and safety of capital. Let us look at how gold is suitable on these two parameters.
1. Liquidity: Liquidity refers to the ease with which any investment can be sold instantly and converted to cash. When it comes to physical gold, it would be inconvenient to sell it or keep as collateral instantly when money is urgently required. Also, due to possible impurities, the seller may not get the desired price. However, if gold is invested through the digital route, i.e., gold mutual funds or gold ETFs (exchange traded funds), selling them could be relatively easy.
2. Safety of Capital: Gold prices are impacted by varied factors like demand and supply, inflation, interest rates, import duty, government reserves, US dollar value, etc. Gold as an asset class is inherently volatile like equity. This is evident from the 3-month rolling return chart below since January 2018.
During such 3-month blocks over the 5-year period, gold prices have oscillated quite widely in a range from as high as 13 per cent to as low as negative 10 per cent. Further, gold has given negative monthly returns 40% of the times over the last 5 years. Would you want your emergency fund to endure this kind of volatility?
An emergency fund as the name suggests is for funding any contingency situations. It is not the returns that are important here, but the availability of money on hand, required any second, minute of any day. Having an emergency fund is about peace of mind which should absolutely not be compromised upon.
While gold may be partially liquid if invested digitally, it is far too volatile to be part of your emergency corpus. So, do not consider gold while building your emergency corpus. A combination of bank deposits, liquid mutual fund and some savings bank balance would work just fine in any emergency.