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Rising Gold Price - Pandemic Times

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July 24, 2020

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

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