All that glitters is gold

On July 22, gold prices in India reached an all time high of INR 50,000 for the first time. Gold prices increased by more than 27% from the recent low of INR 38,400 in March 2020. Even in the global markets, spot gold prices rose to USD 1,865.81 an ounce, the highest in almost eight years.

What is surging gold price?

Gold prices are reaching new highs due to U.S.-China tensions and a weaker dollar. Along with that uncertainty over covid-19 pandemic and low interest rates have boosted the appeal of gold which is perceived as a safe haven asset. Western investors are piling into the gold pushing the prices to an eight year high. Meanwhile, demand in China and India, the world’s two biggest buyers of gold bars, coins and jewellery, plunged after the coronavirus stalled imports and emptied malls.

“Fear-driven investment demand in developed countries has contributed about 18% to this year’s gain in gold prices, while weaker buying by emerging-market consumers provided an 8% drag.”

-Goldman Sachs Group Inc

The demand for gold in 2020 has been almost exclusively supported by investment demand. Also, as per the 2020 Central Bank Gold Reserve Survey, where the survey polled 51 central banks showed strong signs of an increase in the gold’s relevance for central bank reserve management. 20% of respondents plan to add gold to their reserves this year.

Source: World Gold Council

Gold rally after 2008 crisis

If we go back in history, gold had been persistently rallying for a couple of years after one of the biggest crises in 2008. It was crisis time for equity and financial markets and during that period the gold kept glittering throughout. Many major indices including Indian markets had taken a massive hit due to the subprime mortgage crisis. However, gold prices jumped from USD 716 per ounce to touch the level of USD 1,910 an ounce by October 2011. When the equity markets around the world are volatile, investors tend to heavily rely on safe haven to preserve their capital. The same tendency is being witnessed presently amid the cloud of COVID surrounding.

What is the way ahead?

Most of the analyst in the market expects the gold prices to further increase in the near future. Rise in inflation could be one of the reason for the future price rally. Several central banks across the world has begun the money printing program. Increasing the money supply by dramatic amounts in an economy is likely to be inflationary. While most of the risky assets don’t perform very well when the economy experiences inflation, gold by its nature increases in value with inflation and hence is considered as a good shield against inflation. People tend to hoard more gold in order to hedge themselves against rising inflation, thereby increasing its price in future.

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