The year 2020, since its inception, has been favourable for gold. Starting with USA's military strike that killed Iranian major general Qasem Soleimani to the WHO declaring the COVID-19 outbreak a pandemic, there have been several events that made the outlook of markets riskier. In geopolitical and economic uncertainties like these, investors place money on the precious metal, a traditional safe-haven asset.
Earlier this week on 24 June, gold price in India on MCX (Multi Commodity Exchange of India), touched a new record high of Rs 48,589 per 10 grams. Gold mutual funds have delivered over 40 percent returns to investors. In fact, the yellow metal beat other asset classes and categories to become performer this year due to the pandemic and experts say that prices will remain high as long as COVID-19 infections continue to rise.
In the international market, spot gold scaled to a near eight-year high of $1,779.06 on 24 June and since rates in India are dictated by the movement in global rates as well as rupee's exchange value, a surge was seen.
4 factors affecting gold prices at the moment:
1. Coronavirus pandemic
COVID-19 has been a major spoiler this year for every important economy in the world. On Thursday, India, as well as the US, registered their biggest one-day surge in the number of infections with the spread of the virus yet to come under control.
Considering the damage already seen from lockdowns imposed, the complete ill effects of the pandemic on the economic activity is yet to unfold and probably extend.
While China has been fighting the pandemic since December 2019, the world experienced the height of the coronavirus panic in March. It has been 4 months since restrictions on free movement were imposed, and economic activity is far from normal. While the global economic growth had already slowed down amid US-China trade war, Brexit and other reasons, the pandemic caused a free-fall.
2. Economic slowdown
The IMF on 24 June slashed the global output forecast and projected the global economy to contract by 4.9 percent.
"The COVID-19 pandemic pushed economies into a Great Lockdown, which helped contain the virus and save lives, but also triggered the worst recession since the Great Depression," said IMF's chief economist Gita Gopinath.
The pandemic shut businesses, some permanently. Companies are on a cost-cutting mission, laying off employees. The unemployment rate has recovered from May highs, however, those in the unorganised sector are largely engaged in casual jobs.
Amid uncertainty on earnings, consumers are also spending less, reducing sales opportunity, a vicious cycle of cash flow.
3. Another possible crash in stock markets
The IMF also warned that stock markets and other risky assets could see a second blow if coronavirus spreads more widely, lockdowns are reimposed and trade tensions surge. At present, the equity markets appear positive, despite the economic reality.
A "disconnect" between financial markets and economic prospects has emerged, said the report, by Tobias Adrian, Director of the IMF‘s Monetary and Capital Markets Department and Fabio Natalucci, a deputy director in the department. That "raises the spectre of another correction in risk asset prices," with valuations across many equity and corporate bond markets "stretched."
A correction could be prompted by a deeper and longer recession than currently anticipated, a second wave of the virus or reinstated containment methods.
Trade tensions are rising between the US and China and anti-China sentiments in India amid border tensions also helps gold prices.
Economic uncertainties that make equities risky have historically made gold prices rise. In 2019, U.S-China trade tensions caused the metal prices to gain and a rapid surge was also seen during the 2008 financial crisis. When equity markets become risky, gold wins.
4. Low-interest rates
Central banks around the world have lowered their interest rates to historic lows to push growth and keep liquidity high. These COVID-19 measures are seen to benefit gold. While RBI lowered its repo rate to 4 percent, the US Fed Reserve has set its interest at zero.
The US Fed had added $3 trillion to its balance sheet purchasing mortgage-backed securities, US treasuries and corporate bonds. The American central bank's balance sheet is at risk of devaluation, and should the underlying assets fail, gold will respond by "rising to a price that balances the Fed's balance sheet," said Dan Oliver, founder of Myrmikan Capital to Kitco.com saying that spot gold price could go as high as $10,000 an ounce.
Should you be buying gold?
Whether you will make gains from gold on a possible collapse in the equity markets is as good as a coin toss guess. You will know when you know.
However, as an investment strategy, experts suggest placing some money on gold, an asset that is not governed by a central bank and is always going to be scarce.
Do not place all your eggs in the same basket but diversify. Gold investments could be made in the form of gold mutual funds and ETFs as well.
Amid the pandemic, US elections and trade tensions, gold holds the benefit of doubt at the moment.
If you decide to invest, it's better to stagger your bets. If you make periodic investments, like in a SIP, the rupee's fluctuations, as well as gold price fluctuations, will average out, providing better gains due to averaging of costs incurred.
The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.