Will the glittering performance of gold continue?
Gold prices in India have increased from Rs 32,850 per 10 gram at the end of May 8 2019 to Rs 47,435 (per 10 gram) at the end of May 7, 2020. India is the second-largest consumer of gold in the world, after China. Despite this, the domestic gold prices are mostly determined by the movement of US dollar against Indian rupee and also by, the prevailing geo-political as well as economic condition globally.
The current pace of appreciation in the gold prices in India is primarily due to the slowing economic growth, coupled with depreciation of Indian currency. Nevertheless, what accentuated its rise is the economic uncertainty due to COVID-19. Globally, the pandemic has led to a sharp downturn in the economic activity and underperformance of other asset classes.
We believe that the appreciation in the gold prices is likely to continue on the back of higher liquidity injection from central banks around the world. Major economies such as USA will continue printing of money as well as massive expansion of fiscal deficits that will lead to a further depreciation in the value of paper currencies. These are the ideal situation for the gold prices to rally.
Although the price of gold in Indian rupee is at an all-time high but internationally, they are still 10 per cent below their all-time high. Therefore, there is enough room for gold prices to rise further. Besides, there is a substantial growing demand for gold from central banks across the globe and also, by ETFs in recent years.
According to a report released by Goldhub, globally, ‘gold-backed ETFs added 170 tonnes-net inflows of USD 9.3 billion in April, boosting holdings to a new all-time high of 3,355 tonnes. Inflows have been strong and consistent in recent months but not unprecedented. Rolling twelve-month inflows of 879 tonnes just surpassed those of 2009 and 2016, while rolling six-month inflows are less than two-thirds of 457 tonnes of inflows in the comparable time periods of 2009 and 2016.’
The current price strength of gold is very much similar to the global financial crisis of 2008-2009. At that time it rallied back, following the initial quantitative easing (QE) program in the US, which, propelled gold over 130 per cent higher at its peak in September 2011.
Therefore, an investor can buy gold as part of their portfolio, not exceeding five per cent. Moreover, the mode that they can choose to invest in sovereign gold bond (SGB), a substitute for holding physical gold without the hassle of buying and storing it physically. Capital gains on SGBs are exempted if held till its maturity, i.e. of eight years. Also, in between, if you require liquidity; you can start trading it on stock exchanges within a fortnight of the issuance or date notified by RBI. The best thing about SGBs is the interest payment attached to it as investors stand to get 2.5 per cent of interest on the initial investment.