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Gold prices are surging primarily due to a slowdown in global economy.
Gold prices are surging primarily due to a slowdown in global economy.

Is the rally in gold prices sustainable?

  • Gold is a hedge against inflation and typically performs better than equities and debt in times of global turmoil
  • IMF has forecast that in 2020 the global economy may shrink by 3% due to the outbreak

NEW DELHI: Gold prices have been scaling new highs almost daily. The price of the safe-haven asset has surged 7% in the first fortnight of April, with pure gold, of 999 purity, touching a high of 46,000 per 10 gram on 13 April. Prices have surged by 1,500 in the last three trading sessions.

On the MCX, the June gold contract had touched a record 47,000 per 10 gram earlier today.

Investors have flocked to the safe haven asset, given the economic turmoil world over because of the covid-19 pandemic and the consequent to hit to businesses.

The International Monetary Fund (IMF) has forecast that in 2020 the global economy may shrink by 3% due to the outbreak, in what could be the worst downturn since the Great Depression of the 1930s.

No wonder gold has been a favoured investment instrument recently. According to report by the World Gold Council (WGC), the assets of the global gold-backed ETFs (gold ETFs) and similar products added 298 tonnes, or net inflows of US$23 billion, across regions in the first quarter of 2020, the highest quarterly amount ever in dollar terms and the largest tonnage addition since 2016.

Even in India assets of gold-backed ETFs have surged 34% from 5,767 crore in December 2019 to 7,949 crore in March 2020 as per the Association of Mutual Fund India (AMFI) data.

People have been wondering if there is any steam left in the rally.

Kishore Narne, associate director and head, commodities and currencies, Motilal Oswal Financial Services Ltd, said, “There is no reason in the near term for the rally in the gold prices to come to a halt."

“Governments across the globe are coming up with stimulus packages to revive their economies. They will be printing more money to fund their stimulus which will debase the currencies and provide support to gold prices. Abundance of liquidity and historically low interest rates which we are witnessing right now are conducive for rally in gold prices," said Narne

However, there is a section of experts who believe that the rally may halt if global central banks start selling their gold holdings to fund stimulus packages to deal with the aftermath of the pandemic.

“I don’t think people should go overboard in buying gold. The current rally is driven by the uncertainty of the impact of Coronavirus pandemic on economic growth. We may see the rally coming to a halt if some vaccine is invented for coronavirus. Also, there is a possibility that the central banks start selling their gold reserves to fund their economic stimulus packages. This can curtail the rise in prices," said Kartik Jhaveri, founder and director, Transcend Consulting Ltd.

However, Chirag Mehta, senior fund manager, alternative investments, Quantum Mutual Fund, brushed aside the possibility of central banks selling gold saying it is like using change to buy something big.

“Governments across the globe have announced stimulus worth 7 trillion US dollars and if you look at the gold reserves of the US (who have the biggest reserves), it is around 8,000 tonnes which is equal to 400 billion US dollars. It is very small compared to the kind of stimulus packages they are coming out with," he added

“Globally, governments are envisaging to provide a further stimulus of around 1-2 trillion US dollars. Also, gold is considered as a pillar to the currencies so they may not like to liquidate their gold holdings," said Chirag.

Experts believe the rally may continue in the near term.

"I believe gold prices could rally 30-35% in the next 12-18 months," said Narne.

What you one do?

Gold is a good asset class to diversify the investment portfolio, as it works not only as a hedge against inflation but generally performs better equities and debt in times of global turmoil.

“I don't think people should invest more than 15% of their assets in gold. As unlike other assets such as equities one can’t predict the returns from gold as it is not a productive asset like equity," said Suresh Sadagopan, founder Ladder7 Financial Advisories.

The government has announced the issue dates of sovereign gold bonds. You can opt for them if you are planning to invest in gold for long term.

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