Yellow Metal To Reap Golden Harvest

The faster engulfing of world population by novel Coronavirus (COVID-19) contagion has spiked the price of the yellow metal globally. Apart from the deadly virus, Sino-US trade war has played a crucial role behind gold price skyrocketing. Now the pandemic has wreaked havoc on the stock markets around the world, causing major indices to crash to their multi-year lows. This has had a direct bearing on gold prices, causing them to rise to an astronomical high.

In fact, some experts are of the opinion that gold prices are likely to surpass ?50,000 per 10 grams mark in the next 12 months.

The upheaval caused by the virus, leading to economic lockdowns all across has altered the world’s perception towards everything. Fear of an unknown future has permeated so deep in the social fabric that everyone continues to believe the worst is yet not over. The sliding global economy has left people feeling anxious about the huge monetary “stimulus” that would cause fiat money supply to increase without corresponding growth in productivity. Needless to say, that owing to such activities, investors’ search for a safe haven have sharply enhanced gold’s status as an investment tool.

Gold being a highly liquid and probably the best-performing asset class year-to-date, lends itself well to liquidation during uncertain times; helps investors raise cash and counterbalance losses stemming from other asset classes. This is a critical role that gold plays and the reason why it is a preferred tool for diversification.

Sharing his views on the current price trends and expected performance of gold, Somasundaram PR, Managing Director, India, World Gold Council says, “India as a price-taker, is influenced by these global factors and in addition, rupee depreciation fuelled INR/rupee price increase. However, gold market is practically frozen with no imports, recycling, refining, manufacturing or selling and domestic prices are at a steep discount to international prices. Yet, even at this level, INR/rupee gold prices are at life-time high.” says

Demand for gold in India for January-March quarter (Q1) 2020 was at 101.9 tonnes, down by 36 per cent as compared to overall Q1 demand for 2019 (159 tonnes) due to the economic uncertainties brought in by the novel Coronavirus outbreak, said World Gold Council in its latest report.

Total jewellery demand in India during the quarter was down by 41 per cent at 73.9 tonnes as compared to Q1 2019 (125.4 tonnes). The value of jewellery demand was ?27,230 crore—a drop of 27 per cent from Q1 2019 (`37,070 crore). Jewellery demand was at 11-year low.

While the total investment demand for Q1 2020 was down by 17 per cent at 28.1 tonnes in comparison with Q1 2019 (33.6 tonnes), total gold recycled in India in Q1 2020 was 18.5 tonnes, as compared to 16.1 tonnes in Q1 2019, a rise of 16 per cent compared to Q1 2019.

However, why are investors turning towards the yellow metal in times when the market is going through a turmoil?

“The main reason behind investors turning towards gold at times of market crisis is the fact that the yellow metal would not lose its worth completely. It may decline or increase, depending on the demand; however, it would not lose all of its value. The current market scenario has caused a spike in the gold prices of late as both individuals and institutional investors have turned towards gold. The inflow of funds into listed gold ETF has been steady from all regions,” says Archit Gupta, Founder and CEO, ClearTax. According to the World Gold Council’s global gold-backed ETF flows April 2020 report, globally, gold ETFs added 170 tonnes – net inflows of $9.3bn (5.1 per cent) – in April, boosting holdings to a new all-time high of 3,355 tonnes. Assets under management also reached a new record high of $184 billion as gold in US dollars moved higher by 5.8 per cent.

Somasundaram says ETF inflows in India increased by four tonnes and Sovereign Gold Bond issued around Akshaya Tritiya saw a significant response.

“However, India is primarily a retail gold market, there is very little institutional buying though allocations from mutual funds as an alternative asset could rise. But retail jewellery market will be the driving force of Indian gold market for the foreseeable future, with digital engagement picking up some momentum,” he adds.

Adding on to it, Navneet Damani, Vice President, Commodities Research, Motilal Oswal Financial Services, says,  “There has been series of events lined one after the other, which pushed the gold prices to its highs, apart from other uncertainties, outbreak of COVID-19 since the start of this year has petrified the market and increased distress in major economies globally.” 

“As panic increase demand for gold does too, although witnessed in the recent past amidst the lockdown situation and all other asset classes bleeding red, market participants liquidated their positions from gold in order to sit on cash in this difficult time. In the previous year (2019) gold prices have rallied over 25 per cent last year and this year again has given ~10 per cent returns,” he adds.

Comparing the average price of gold last year, ?35,220/10gms, to the present rate of ?47,200/10gms, gold has appreciated over 34 per cent. Comparing the gold price of last year around this time, ?31,496/10gms, to the present rate of ?47,200/10gms, gold has appreciated nearly 50 per cent.

“If we look at the average annual return of gold since 1981, it was of 10 per cent; it has outpaced the Indian Consumer Price Index (CPI) that averaged over the period at 7.35 per cent. In India, gold’s dual position as an investment and for adornment has allowed it to deliver average returns of approximately 9 per cent over the past 10 years, comparable to stocks and more than bonds and commodities,” adds Somasundaram. Gupta says gold is expected to float between ?45,000 and ?47,500 levels in this fiscal year.

Echoing similar thoughts, Damani says, “Since we have seen such a good run up and liquidation in other assets classed, there could be bouts of correction in the near term. But the medium-term picture still looks very promising and expect gold on the Comex to above $2,000 and domestic gold prices could target upwards of ?52,000 over the next 12 months.”

Shekhar Bhandari, Senior Executive Vice President and Business Head, Global Transaction Banking & Precious Metals, Kotak Mahindra Bank says, “We can expect gold prices to continue the rally,  to settle above ?5,000 a gram by the end of this financial year, primarily driven by the COVID-19 crisis and its significant impact on the global economy.”

Gold is a hedge against uncertainty and a good investment vehicle, especially in the current scenario. But is gold price shooting up because more central banks are increasing their reserves?

“No, that is not the case. Gold price movements cannot be attributed to Central bank buying though this trend further reinforces gold’s diversification and safe haven properties. Central banks have been net buyers for over a decade now and more recently, in 2018 and 2019, bought 650+ tonnes annually, which is a multi-decade high since removal of gold standard. The motivations for buying gold differ between countries. Central banks have three main objectives when they are thinking about reserve assets: to keep their assets safe, to keep their assets liquid and to generate returns. Gold can help to meet all three policy objectives,” clarifies Somasundaram.

Pankaj Bobade, Head - Fundamental research, Axis Securities highlights as the Central banks of developed nations have been on easing spree to fight the economic contraction, fiat currencies are expected to face pressure in the near future. In such a scenario, gold is likely to emerge as a safe-haven asset.

“One should have a part of the portfolio invested in Gold ETF as an insurance against the possible volatilities expected in the global financial market,” he adds.

Praveen Singh, AVP - Fundamental Research, Sharekhan by BNP Paribas says that global interest rates have fallen sharply as global central bankers have cut around 750 basis points of rates to combat the global economic slowdown.

“The major central bankers are forced to adapt accommodative monetary policies and support the crumbling economies with everything that they can, which includes quantitative easing too. Talks of helicopter money are not really rare anymore. Although physical demand for gold remains weak in key consuming nations like India and China, we are seeing strong physical demand in the US, Canada and Australia,” he adds.

Since people are money-starved due to the tight economic health, would there be more recycling of old than fresh buying this year?

Somasundaram says it is difficult to predict as several factors are involved with no clarity such as guidelines by authorities on in-store buying post the lock down period, imports, logistics issues, return of karigars and such.

“The scale of economic disruption is not clear yet and when it does, consumer sentiment could change and policy reactions too. Normal monsoon as predicted by IMD could be positive. Recycling and loans against jewellery could rise significantly following a combination of high gold prices amid stress on household finance,” he adds.

As every investor is going through the turbulent times and looking for a ray of hope, investing in the yellow metal can reap golden harvest for many of them in the longer term.

aparajita@outlookindia.com,
yagnesh@outlookindia.com