Gold still shines bright in times of high uncertainty

Gold prices have witnessed a 24% gain this year and may continue to rise, leading Berkshire Hathaway to buy stake in the world’s largest gold mining company. This, after the Oracle of Omaha Warren Buffett has highlighted the metal’s lack of utility in the past. Mint explores.

What’s behind the rise in gold prices of late?

The price of gold has risen suddenly for a number of reasons. The increased uncertainty over the last few months, which was a fallout of the coronavirus outbreak, has resulted in investors looking for an asset that would store value. Investors thus started shifting to the yellow metal as this was viewed as a safe asset. This increased interest in gold by investors, big, or small, across the world has caused an increase in gold prices. Additionally, lockdowns imposed in different parts of the world to check the spread of covid-19 curtailed supply which also could have contributed to an increase in gold prices.

Do inflation adjusted returns affect gold?

Gold, as a store of value does not bear interest, so directly, the yellow metal does take a beating from inflation. However, if one purchases an instrument in the form of sovereign gold bonds, they entail an interest on returns as well. The value of the metal can be realized only when we sell it in the market at the prevailing rate. Generally, gold prices have been able to preserve the real value and the increase in prices has offset the rising inflation. This is because unlike money, gold is limited in its supply and thus is less affected by the Reserve Bank of India’s monetary policy rate cuts, so it acts as a decent store of value.

What about gold and the policy responses to covid?

Governments across the world have responded to the pandemic with unprecedented levels of fiscal and monetary intervention. Despite this, economic uncertainty prevails. These factors are collectively resulting in greater interest in gold and driving prospects of the yellow metal giving returns because of a further increase in prices.

How do govt bonds fare as store of value?

The US dollar and the 10-year government securities are also typically viewed as a safe store of value. However, with record low levels of yields, investors are now looking for other similar assets that could provide a higher return. Central banks globally have been trying to push government security yields downwards to aid the borrowing programmes. Across the world, governments are increasing their borrowings while selling bonds in various currencies even as their central banks are ensuring surplus liquidity.

How’s the sentiment towards the US dollar?

The prospects of return inflation have resulted in investors being cautious about using the US dollar, which is a non-interest-bearing asset that works as a store of value. An increase in inflation would adversely impact its purchasing power. Meanwhile, substantial intervention by the US could also result in significant supply of the US dollar, which could result in a weaker dollar. An excess supply of US dollars, liquidity surplus, and prospects of continuing low interest rates add to gold’s charm.

Karan Bhasin is a policy researcher.