Gold Rush: Gliterry or Jittery?

Gold is an ageless precious metal that has an emotional, financial and cultural value, not just in India, but globally. The metal finds its application in jewellery, technology, and by central banks as well as investors, which leads to the formation of various sectors within the gold market. These sectors rise to prominence at different points in the global economic cycle.

The gold market therefore, is extremely diverse and growing. However, the supply of gold has changed very little over time; increasing by hardly 1.6% annually, over the past 20 years. This diversity in demand and limited/scarce supply forms the basis of gold’s mighty quality as a ‘store-of-value’. The chances of gold, losing its entire value are almost non-existent. This makes it one of the most secured investment options. Apart from this, Gold is highly liquid; it carries no counterparty risk, acts as a diversifier and helps to mitigate losses in times of market turmoil. Also, it acts as an inflation hedge and carries no currency risk. Due to all these qualities, Gold is considered as a safe-haven investment option.

Returns on gold in comparison to other asset classes, over various time periods.

Gold Prices During Pandemic -

Gold has been on a generally positive trend since 2018, but the onset of COVID-19 Pandemic has brought Gold under the spotlight, as one of the best-performing assets, with the price rallying by approximately 17% in the first half of 2020 followed by an additional 10% in July. It hit an all-time high on August 7, 2020, when the price stood at $2072.50 per 28g (globally) and ₹56,200 per 10g (India). However, later, prices have shown a correction from the August 7 high in response to the improvement in the global risk sentiment.

Gold prices in the month of August (per 10g)

Interestingly, the demand for gold jewellery, in the period between April-June 2020, was down 70% (from 213.2 tonnes last year to 63.7 tonnes) and the demand for gold bars and coins was down 32%. Even though sales were drastically low, the price of gold has skyrocketed over the same period.

As per classic economics, the price of a commodity falls, if the sales decline; i.e. if the demand falls, the price too falls. But our yellow metal has defied the classic economic principles during these difficult times, and investors are not even surprised. This is because gold, for ages, has been the most reliable safe-haven investment. Although the demand for physical gold slumped due to the pandemic, the investment demand for gold increased manifold, during the same period. Data from the World Gold Council showed that the investment demand for gold stood at 583 tonnes during April-June, this year, which is almost double from the same time, last year (when it was 295t). Thus, we can say that the investment demand for gold, in the form of gold ETFs and other similar products, has driven the rally in gold prices, during the pandemic.