- Vinay Nair
Gold proved its mettle as a crisis commodity
Gold is considered to be a safe haven for investors during times of economic and geopolitical crisis.
Gold prices have rallied in almost every crisis situation. And has once again proved its "mettle" amidst the most recent coronavirus pandemic.
Gold prices have risen more than 25% in the first seven months of 2020. Domestic gold prices have gone up by almost 40%. Gold has outperformed almost all of the other major asset classes. It is for this reason that gold is sometimes referred to as a crisis commodity.
Gold prices have seen the largest jump during the current crisis as compared to other crisis driven gold rallies like the 9/11 terror attack and the global financial crisis in 2008.
The yellow metals' price went as high as ₹5,500 per gram in July 2020
Investment in Gold is one of the most convenient methods of saving for a lot of non-traditional investors with little knowledge of different investment vehicles. Gold is the metal we fall back on when other forms of currency don’t work.
Major reasons for backing gold
Gold has not just maintained but increased its value throughout the ages. Every government tries to own a lot of gold in all possible ways.
Gold is considered as an inflation hedge; therefore, governments buy large amounts of gold when the country starts experiencing a period of high inflation thereby increasing the price of gold.
Gold also helps hedge against currency volatility as its characteristics and investor sentiments towards it help it maintain its high value as compared to the currency. A country that exports gold and has an excess of gold reserves will see an increase in the strength of its currency and gold prices rise. As a result, the value of total exports becomes higher.
Gold can reduce the value of currency as central banks sometimes need to print more currency to purchase gold, in turn increasing the supply of money in the economy and ultimately reducing the value of it.
Gold is one of the most liquid assets and carries very little default risk
Influence of United States on gold
Since the great Depression of 1929 to the WWII, and 2008 financial crisis to the coronavirus induced recession of 2020. The United States has played an influencing role in the change of Gold rates, worldwide.
Gold has had a significant impact on the U.S. economy, from the gold standard to the price of gold. The value depends on its relative safety compared to other investments.
Apart from being an investment it is also a luxury good.
Investors can look at investment in gold as a way to diversify their portfolio to reduce overall risk. In recent years the increased wealth in emerging and developing markets has boosted the demand for gold.
Consumers also place a high value on gold not just as an instrument to save, but also as a luxury good for consumption. India is one of the largest gold-consuming nations in the world. One of the major uses of gold in India is in the form of jewellery. The Indian wedding season is traditionally the season that sees the highest demand for gold in the country. In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast.
Governments in various countries have now come up with investment instruments with gold as the underlying commodity, providing exposure to the change in gold prices without storing it in the physical form. In India owning gold or gifting gold is considered as a luxury commodity that not everyone can afford. Physical and chemical characteristics of gold like the unique and beautiful colour along with its composition make it a very attractive metal.
During the pandemic the global equity markets had tanked and constant change in policies by the government made investors even more risk averse. Investors were looking at safer asset classes and as we have already established that gold is a safe investment in such times, it is no wonder that the world witnessed significant fund flows in gold. The main reason for the abnormal rally in the gold prices since March 2020 was that long-term investors were looking for risk diversification and started pouring money in gold Exchange Traded Funds (ETFs) and Sovereign gold bonds.
Although gold did rally until mid-August, it has seen some downfall in the recent months. A few reasons for this could be the rally in global equity markets bringing back investor confidence in equity, profit booking by investors that invested in gold funds or the strengthening of the U.S Dollar. Everything being said gold has once again proven its worth during a crisis. Gold is still the most valuable metal and is expected to continue to increase in value over the next few years.
With the pandemic expected to bring about vast and permanent changes we can expect the value of gold to increase manifold in the coming few years.