Amid global corona pandemic where economies are seen crashing down gold prices have been at an all-time high. On June 25th the yellow metal reached Rs 48,400 per 10 gm in India. Gold climbed 24% in the first half of 2020 on top of past year's 25% jump. There has also been a surged in demand in gold Exchange Traded Funds also called as gold ETFs. There has been an increase in participation by over 40% with net inflows of more than Rs 3,000 cr. Fund houses are witnessing greater investment inquires from students, professionals and institutions. There is a particular interest among the younger generation who are drown to markets and see ETFs as a smarter way of investing in gold.
Why is gold considered a safe haven commodity?
Source: BloombergQuint
Historically gold performed well every time during an economic crisis. Be it an economic slowdown in 2001, the global financial year in 2008 or the European debt crises in 2013, the yellow mental always shines even when economies struggle. Among the seven asset classes, investors consider gold as a safe haven. Equities, currency, real estate, oil prices and many other depend on economic performance on the contrary the demand for precious metal is related to emotional, cultural and financial value.
Factors affecting gold prices
Source: TheHinduBusinessLine
Socio-cultural factors
People across the globe buy gold for
different reasons which is often influenced by national, socio-cultural factors
and wider macro-economic drivers. Apart from having a cultural significance
countries like India and China hold investment value in gold jewelry.
Downside
of QE
World Bank predicts India's GDP growth to
be 1.5% - 2.8% for FY21 which would be lowest in the last 3 decades. The
government is likely to explore Quantitative Easing (it is a monetary policy
tool used by central banks to buy govt/corporate bonds to create liquidity in
markets) however it will result in higher inflationary conditions, lower interest
rates will also lead to lower returns on savings. Therefore, investors seek
refuge in gold to maintain currency levels.
Correlation
between gold and dollars
Gold typically has an inverse
relationship with the dollar when the value of the dollar decreases relative to
other currencies around the world the price of gold tends to rise in dollar
terms. Therefore, gold continues to perform as it should in times of never-seen-before
economic uncertainty.
Rupee
depreciation
As the Indian rupee continues to
depreciate against the US dollar, foreign investors are trying to flee Indian
markets. The govt. is likely to borrow more to find its Rs 20 Lakh cr stimulus
package. According to quantum mutual fund foreign outflows, rising govt deficit
and falling interest rates will further contribute to Rupee's depreciation.
International gold price is converted to Indian gold price using the prevailing
Rupee-Dollar rate. Thus, a depreciating rupee is pushing up gold prices in
India.
US-China
trade tensions
The corona virus pandemic has strained US-China relations even more. Analysts suggest: Issues between the two will continue even after the pandemic and even when the 2020 US presidential elections are over. The tensions related to international cooperation, ideology, currency, military, technology are unlikely to de-escalate. This may contribute in the eventuality of a global trade war and have far reaching economic ramifications.
What's
the outlook?
Source: Capital.com
Banks such as UBS & Goldman Sac say that gold is a long-term investment and not just an asset to hold for near-term returns. They say that gold is likely to reach Rs 50,000 - Rs 55,000 over the next year and probably appreciate even more.
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