Rising Gold Price - Pandemic Times

Why in news?

After over 9 years, gold prices hit Rs 50,000 per 10 grams on 22 July 2020 in India.

What is the price scenario?

• Gold had a remarkable performance in the first half of 2020.
• It increased by around 25% from its low in March 2020 and significantly outperformed all other major asset classes.
• Gold futures prices soared to a 9-year high of $ 1,856.60 per troy ounce in London.
• It is inching closer to their record high of $1,920 an ounce hit in September 2011.
• [One troy ounce is equivalent to 31.1034768 grams.]

How big is India’s gold market?

• India is world’s second-largest gold consumer after China.
• Households in India may have piled up around an estimate 24,000-25,000 tonnes of gold.
• Various temples across the country also hold sizeable gold holdings.
• The RBI bought 40.45 tonnes of gold in the financial year 2019-20.
• This took its total holdings of gold to 653.01 tonnes.

Why is gold price going on increasing?

• Gold prices in India are dictated by international prices.
• International gold prices have been on the rise in the last few months.
• It picked up pace amid sharp losses in the dollar, additional stimulus measures and robust investor inflows.
• A host of factors have increased the appetite for gold, like -
  1. global uncertainties triggered by COVID-19 pandemic
  2. weak dollar
  3. low-interest rates
  4. stimulus programmes
• Equity markets around the world rebounded sharply from their March 2020 lows.
• But the high level of uncertainty surrounding the pandemic persists.
• So, like money market and high-quality bond funds, gold benefited from investors’ need to reduce risk.
• Rising virus cases and US-China tensions have also underpinned the gold price.

Why is gold a safe option?

• Gold is an integral part of wedding ceremonies in India.
• It is traditionally used as a hedge against inflation and considered as a safe haven for investors during periods of uncertainties.
• Whenever stock markets, real estate and bonds fall across the world, investors turn to gold to park their funds.
• The fall in the value of other asset classes and global uncertainties in the wake of Covid-19 helped gold climb to a record high.
• A key factor behind this robust performance is that the supply growth of gold has changed little over time.
• It has increased by approximately 1.6% per year over the past 20 years.
• [In contrast, fiat money can be printed in unlimited quantities to support monetary policy.
• E.g. the Quantitative Easing (QE) measures in the aftermath of the global financial crisis]
• Historically, gold has generated long-term positive returns in both good times and bad.
• Looking back almost half a century, the price of gold has increased by an average 14.1% per annum since 1973.
• [1973 is when Bretton Woods collapsed and the gold standard system of pegging the currency to gold ended.]

How does the future look?

• Prices are expected to go up to Rs 65,000 per 10 grams in the next 18-24 months.
• Because, the fundamental factors could continue, that are expected to dictate the price trend :
  1. lower interest rates and negative rates in some economies
  2. enormous amount of liquidity
  3. expanded fiscal balance sheets of governments which are trying to push growth amidst Covid-19
• So, precious metals would trade firm until the number of global cases of Covid-19 is under control or a vaccine is introduced, which is still a few months away.
• The pandemic will thus continue to reinforce the role of gold as a strategic asset.

Source: The Indian Express