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Why Gold Prices Are Likely To Stay High

Olga Robert
·3-min read

COVID-19 and uncertainties about global economic growth intensified by the pandemic have sparked demand for the precious metal due to its safe-haven appeal. The metal, that has been used as a hedge against inflation and market-related uncertainties has seen a remarkable rally in the last six months.

Rising around 25 percent from its low in March, gold prices hit new all-time highs in the domestic as well as international markets in August.

In the last one year, it has surged nearly 40 percent in value. In 2020, it has significantly outperformed other major asset classes amid a global health crisis, unseen for at least the last 100 years, that halted economic activity in major economies for at least two months.

In August, gold ETFs (exchange-traded funds) witnessed inflows for the sixth straight month. Data from the Association of Mutual Funds in India (AMFI) showed that net inflows into gold ETFs reached Rs 5,356 crore in the January-August period.

Internationally, iShares Gold Trust (IAU) is going strong with 25 weeks of inflows.

In times of volatility in stock markets, unfavourable environment for real estate and even bonds, around the world, investors flock to the yellow metal.

Gold rates in India are also dictated by movement in the international markets.

Another key factor favouring gold prices is that the supply growth of the metal has changed very little in the last few years. Only approximately 1.6 percent rise per year has been seen over the past 20 years, whereas in contrast, fiat money can be printed in unlimited quantities to support monetary policy, which has been exemplified by easing measures taken by central banks to support their economies as they stare at recession after a global financial crisis.

Gold is a reserve asset because it carries no liability, is highly liquid, not governed by any singthele country, carries no credit risk and is scarce in quantity.

High prices are likely here to stay

Gold analysts remain bullish on the metal and have estimated the rates to go as high as Rs 65,000 per 10 grams in India in the next 18-24 months. Given the threat posed by the pandemic to the global economy and the longer-than-expected time taken to curb the spread of infection, experts believe that the segment may continue to see traction with investors.

Until the number of daily increase in COVID-19 cases is controlled or a vaccine reaches the majority of the population, the demand for precious metals is expected to stay high.

Demand for physical gold in India

According to the estimates of the World Gold Council, households in India may have piled up around 24,000-25,000 tonnes of gold. The Reserve Bank of India bought 40.45 tonnes of gold in the financial year 2019-20, raising its total holdings of the yellow metal to 653.01 tonnes.

Various temples in the country also hold sizeable quantities of gold.

However, due to the lockdown, high prices and postponed wedding season, demand for physical gold in India was affected. Demand for the metal at retail outlets fell by 36 percent to 101.9 tonnes during the January-March quarter of 2020, when compared to 159 tonnes in the same period last year.

Sales at these stores were also hurt by a rise in import duty on gold to 12.5 percent introduced by the central government last year. Additionally, buyers have to pay 3 percent GST on these purchases.

With only a few buyers even after some reduction in prices seen in September, physical gold dealers continued to offer discounts on retail prices for a fourth straight week (as on 12 September).

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