Gold has beaten returns of almost every asset in a period of 1 to 3 years. The returns in the last 1 year from gold prices in India has been fantastic at nearly 35 per cent. Many analysts are betting on gold gaining further momentum in the coming days. Here are 3 reasons why gold prices could continue to rally at least in the very short term:
1. Rally may continue on the back of rising Covid-19 cases
India, the US and many other countries are seeing a surge in the number of Covid-19 cases. In fact, both India and the US reported record number of Covid-19 cases on Friday. Gold is a safe haven asset and since Feb, investors heavily bought into gold, following the rise in Covid-19 cases.
With infections not abating anytime soon, we might see some more rally for gold in the coming weeks. While it is difficult to predict the long-term trend, most analysts believe that the trend is firm.
"The economic and geopolitical environment remains supportive for gold investment, with most of the existing gold demand drivers still relevant. The opportunity cost of holding gold remains low, as continued central bank activity keeps interest rates low or negative, while several countries continue to experience high levels of tension/unrest," the World Gold Council has said.
Low interest rates and a poor economic environment globally, are perfect drivers for gold prices.
2. Limited options
Investors do not have any other investment choice, given that equities are unlikely to go higher anytime soon, given poor fundamentals. On the other hand, fixed deposits and other fixed interest yielding investments are giving very poor returns.
With Covid-19 infections rising and only the noise around a vaccine continuing, gold prices are perfectly placed to gain some more. Apart from this, because of immense liquidity, due to quantitative easing, gold prices may gain.
Low interest rates and abundant liquidity, places gold in a sweet spot. At the moment abundant liquidity, surge in Covid-19 cases, low or negative interest rates and poor returns from other investments makes gold a good choice.
3. Inflows into Gold ETFs take holdings to record highs
Gold-backed ETFs (gold ETFs) recorded their seventh consecutive month of positive flows, adding 104 tonnes in June - equivalent to US .6 billion or 2.7 per cent of the assets under management (AUM) - taking global holdings to new all-time highs of 3,621 tonnes.
The H1 global net inflows was 734 tonnes (US.5 bn), significantly above the highest level of annual inflows, both in tonnage terms (646 tonnes in 2009) and US-dollar value (US billion in 2016).
"To put this strength of demand into context, H1 inflows are also significantly higher than the multi-decade record level of central bank net purchases seen in 2018 and 2019, and could absorb a comparable amount of about 45% of global gold production in H1 2020," the WGC said.
With inflows into Gold ETFs creating a new record, gold prices are likely to continue to get traction. Read all about Gold ETFs and how to invest
About the author:
Sunil Fernandes has spent 25 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds, gold and tax planning.