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Money is in search of safety once again. As Brexit jitters and a renewed fear of decline in global growth hit financial markets, money managers are flocking to safe-haven assets. Consequently, gold prices on Wednesday rose to a two-year high, while the British pound fell to a fresh 31-year low. Safe-haven demand is also pushing government bond yields down in countries such as the US, Germany and Japan.
The renewed uncertainty has rewarded gold investors significantly in recent times, and analysts argue that this could well be the beginning of a new bull run in the yellow metal. Decline in bond yields would further reduce the opportunity cost of holding gold.
Indian policymakers would do well to watch developments in this space carefully.
Renewed investment demand in gold could adversely affect trade balance at a time when exports are expected to remain subdued because of unfavourable global demand conditions.