Gold prices have been on a run globally, with the prices in India hitting a new high of Rs 52,435 per 10 grams on Tuesday. In just two days, the prices rose by around Rs 1,500 per 10 grams. With the prices increasing for seven weeks in a row, the price of gold in India increased more than 5% last week. Globally too, spot gold soared to touch $1,975 an ounce, an increase of $160 in six sessions. In the first half of 2020, the price of gold increased by over 25%.
On the Multi Commodity Exchange of India (MCX), August gold futures rose 0.6% to a high of Rs 52,410 per 10 gram as against a 2% (Rs 1000) increase on Monday to Rs 52,127 per 10 grams. A future is a deal to trade gold in a specific quantity at a price that’s determined now for delivery on a later date, while spot gold is the price that gold is being sold and bought for right now. MCX is the exchange where commodities such as gold are traded.
And not just gold, silver prices too have been soaring. Silver touched an 8-year high of Rs 67,560 per kilogram on Tuesday.
This might bring the question to one’s mind as to why the prices of gold have been hitting new highs at a time when the world is facing an economic slowdown and prolonged uncertainty due to the coronavirus pandemic and trade tensions between countries.
Gold is typically seen as a safe haven. It continues to be a rare commodity, whose supply has not increased significantly over the years. Thus, gold doesn’t fluctuate as much as equities or money markets do, making it a safe bet, even in tumultuous times.
So, when there is an economic slowdown, high inflation, weakening currencies, a fall in stock markets and other investment options, investors are known to flock to gold to use it as a hedge against inflation. The RBI too indicated the same in its last Monetary Policy report where it said that gold prices move in tandem with heightened economic policy uncertainty.
Goldman Sachs said in a report that fear-driven investment demand in developed countries has contributed about 18% increase in gold prices, while weaker buying by consumers in emerging-markets provided an 8% drag.
Historically, when the global recession hit in 2008, gold prices more than doubled from 2008 to September 2011.
Over the years, experts have noted that gold has positive price elasticity, which means that as more people buy gold and demand increases, the price also increases.
Low interest rates too, increase the demand for gold. Currently central banks of most countries are cutting interest rates in a bid to put more money into the hands of people. Analysts believe that liquidity in markets always helps gold prices. Also, lower interest rates usually mean lower return on investments, thus making investors turn to gold.
Gold in India has an inverse relationship with the dollar. This is because India imports most of its gold, which is priced in US dollars. So, a depreciation in the Indian rupee pushes up gold prices. Gold prices also are impacted by the global movement of prices.
Moreover, gold mining has taken a hit across the globe due to the pandemic, which has in turn impacted the supply of gold, further pushing prices up.
However, it is pertinent to note that investors flocking to gold doesn’t necessarily mean that consumers too, are buying more gold.
Gold is considered an investment, especially in a country like India, because it a commodity whose value can be preserved over time and doesn’t deteriorate much, even physically. It is also very liquid and doesn’t carry a credit risk.
However, the economic slowdown in the country has led to massive job losses and the coronavirus pandemic-induced lockdown restrictions have also meant smaller weddings, and jewellery stores being closed for a prolonged time. This has led to the demand for buying physical gold and gold ornaments falling in India.
These factors, along with rising prices, only means that the demand to buy gold in India is likely to be muted at least for the next year.
Analysts expect the uptick in gold prices to continue at least till the end of this year. Gnanasekar Thiagarajan, the CEO of Commtrendz Risk Management Services told Business Standard that they expect gold to touch Rs 60,000 by Diwali in India.
The last time gold saw a similar uptrend in prices (around the 2008 economic crisis), prices of gold began increasing in 2001, and the upward trend continued all the way till 2011, before crashing.
An increase in interest rates, a sharp correction in the US dollar, optimism over there being a vaccine for COVID-19 and hopes of economies recovering could lead to a correction in gold prices, as these factors would lead to investors going back to riskier investment instruments.