Gold prices at all-time high as COVID-19, economic uncertainty drives demand

Gold prices neared Rs 49,000 per ten grams as buyers see the metal as a safe asset

Gold necklace at a jewelry shop Representative image | Reuters

Gold has been shining bright for some time now and on Wednesday, the yellow metal hit a fresh record high, as a still-spreading COVID-19 pandemic and the uncertainties around economic recovery in major parts of the world continues to drive investors to stock up on the safe haven asset.

Gold prices in the futures market on the MCX touched a fresh high of Rs 48,982 per ten gram. In the spot market gold traded at around Rs 48,730 per ten gram. So far in 2020, which has been a volatile year for capital markets, gold is up close to 25 per cent. Over the last one year, gold prices have surged close to 40 per cent.

In the international markets too, gold prices are close to a eight-year peak, with spot gold prices around $1,783.50 per ounce.

What’s driving this rally in gold?

Gold is typically considered a safe haven asset. Many countries went into a lockdown to control the rise in COVID-19 cases. Almost three months later, however, even as governments have begun lifting the lockdowns and opening up borders, coronavirus cases, from India to the United States and Brazil, continue to rise. That has worried investors, who are rushing to the perceived safety of gold.

“The market sentiment is cautious on fast spreading of coronavirus around the globe and concern over second wave of infections. Also, there are worries over reigniting US-China trade war, giving a boost to safe-haven demand for gold,” said Rahul Gupta, head of research – currency, Emkay Global Financial Services.

Currently across major economies, interest rates are at a record low. In the US, benchmark interest rates are close to zero. In India too, the Repo rate is at its lowest at 4 per cent. That also makes gold attractive. Assets under management of global gold exchange traded funds reached a record $195 billion at the end of May, with net inflows of $8.5 billion in the first five months of 2020.

“Easy liquidity by central banks across the globe has pushed interest rates down, making gold an attractive investment bet which is also considered a hedge against inflation,” said Nish Bhatt, founder and CEO of Millwood Kane International, an investment consulting firm.

Where do gold prices go from here?

Navneet Damani, vice president - commodities research at Motilal Oswal Financial Services, expects gold will hover in the range of Rs 48,550 to Rs 49,200.

Gupta of Emkay feels that if gold prices can sustain above Rs 49,000 then it could top Rs 50,000 and trade between Rs 49,750 to Rs 50,600.

World over, national debts are mounting as governments initiate steps to lift the economies hit by the great lockdown. In India, government data shows the fiscal deficit for the current financial year ending March 2021 touched Rs 4.66 lakh crore in just two months of April and May, which is over 58 per cent of the budgeted target. In the US, the national debt recently topped $26 trillion.

The current crisis fuelled by the the pandemic and the unprecedented expansion of balance sheets could hurt the weaker economies particularly hard, say analysts.

In this backdrop, Chirag Mehta, senior fund manager, alternative investments, Quantum Mutual Fund says gold will be a big beneficiary when crisis plagues the world’s reserve currency.

“In spite of rising infections, global policy makers have resorted to lifting lockdowns and throwing cash at the economic ramifications of the pandemic in a bid to quicken resumption of economic activity. Investors who have sensed the shortsightedness of this policy response, are preferring to park funds in assets like gold,” said Mehta.

He says the macroeconomic uncertainties and systemic vulnerabilities will ensure that gold will remain a preferred monetary asset for years.