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Why investors are rushing into gold. And should you?

Mint looks at the factors including the US-China trade spat, Donald Trump threatening to attack Iran for pursuing its nuclear programme and a busy Hindu wedding season that have driven the prices of bullion to record levels

Gold prices are at historic highs. In India, the yellow metal touched 35,960 per 10g—a six-year peak—on Tuesday. Mint looks at the factors including the US-China trade spat, US President Donald Trump threatening to attack Iran for pursuing its nuclear programme and a busy Hindu wedding season that have driven the prices of bullion to record levels.

What are the benefits offered by gold?

Gold offers those who invest in it a long-term safety net with regard to wealth. This is largely because it is difficult to imagine the price of gold ever going down to zero, unlike an equity investment. It is also easily tradable, unlike other physical assets such as real estate. In India, the biggest consuming country of the precious metal, people store gold to meet large, long-term as well as emergency needs. Being an international commodity whose prices are set globally, gold has worldwide acceptance, making it easier for people to trade in it across boundaries. It serves as a hedge against inflation in the long term.

What are the factors that influence gold prices?

Gold, long considered a safe haven and defensive investment in times of global uncertainty, offers avenues for both traditional and new-age investors to store it physically as well as trade in it via exchanges. While it is wise to not be blinded by rules of thumb, historically, gold prices and the US dollar have shared an inverse relationship. It becomes cheaper for buyers to use other currencies to buy the dollar-priced gold. In India it also holds an emotional value and, hence, is often bought but not always sold by the people. Various central banks also keep it as reserves and collateral.

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Why are gold prices on the rise?

The trade war between the US and China is affecting global demand. US President Donald Trump may not hesitate to take the same belligerent stand against Europe and India. Trump is also threatening to attack Iran for allegedly harbouring nuclear weapons. The European Central Bank is talking about printing more currency and the US Federal Reserve has signalled cutting interest rates. This apart, according to the Hindu calendar, the number of auspicious days for weddings this year is 104, higher than that in 2018. This is also boosting demand for the yellow metal.

Any other factors?

Yes. Since the 2008 crisis, several banks printed huge amounts of money, mostly chasing equities. That cycle may be over as global growth slows and geopoliti-cal risks rise. IMF pegs growth at 3.3% this year, down from 3.6% in 2018. Inflation remains below the targeted level in most economies, including India. A 2018 World Gold Council survey said 18% of central banks planned to raise their gold holdings over a year.

What are the chances of another gold rally?

This is difficult to predict. Prices of commodities, including gold, are often influenced by positions big traders, investors and hedge funds take. There could be some more rally in gold, as investors pull some money out of equities to diversify their portfolio. A fallout of the US-China trade war is the weakness in demand from tech firms, which need gold to make their products. A resolution of the trade war and easing of Gulf tensions could bring relief and reverse the gold rally.

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