Below are Views On Will Gold add shine to this Diwali? - Authored Article on Gold by Mr. Mayur Joshi, Executive Vice President, Yes Securities Ltd
The yellow metal has given stellar returns in recent times. Prices of Gold at MCX have
soared by 61% YoY in the last one year. A big question in the minds of those who have not
invested in Gold is whether they should invest at current levels or stay away? The same
question arises for those who are holding the asset. Should they continue to keep it or book
The answer to this question lies in understanding the basics of what drives the price of Gold.
* Demand and Supply: Gold is a commodity, and like all other commodities, its prices are a function of its demand and supply. On the supply side, Gold's output is directly related to mining production. However, people don't consider Gold as another investment asset; it has an emotional and cultural value attached to it. Hence, the demand for this precious metal is influenced by a range of socio-cultural factors as well. On the one hand, Gold is used in jewellery while on the other, it is used by investors and central banks as well. Therefore, the demand for Gold fluctuates at different points in the economic cycle. There is also a certain extent of seasonality, particularly in India as the demand for Gold typically tends to be high during the festive season.
With Diwali and the traditional wedding season just around the corner, India is bound to see a higher demand for Gold. In addition to this, spending curtailments due to pandemic too has led to higher spending towards Gold. Therefore from a demand perspective, prices should continue to remain strong over the medium term.
* Economy and markets: Unlike other commodities, Gold enjoys the unique position as a safe haven asset. Therefore, its prices depend on economic growth and gyrations in the financial markets. During periods of uncertainty and declining growth, investors turn to move funds towards Gold, thereby leading to higher prices. An example of this was seen earlier this year. Lockdowns across the world allowed Gold prices to soar by 7% in 2 weeks, i.e. March 17, 2020, to end March 31, 2020.
While the number of new cases for Covid-19 in India has declined significantly, however, the pandemic continues to cast dark clouds over the global economy and the markets. With the unlocking of the economy, high-frequency data like freight volumes, digital payments, etc. have seen an improvement in India; however, they are still way below pre-Covid numbers. This suggests that gradual but uneven normalization in economic activity. In such a scenario, the investor preference for the yellow metal should continue, thereby supporting its prices.
* Interest Rate: Gold mounted a strong bull run when the Federal Reserve (in 2019) signalled that it was suspending plans to push interest rates higher. Generally, Gold prices have risen best when interest rates fall below the rate of inflation. As the inflation-adjusted return on bonds turns negative, investors feel comfortable investing in Gold as a store of value, even if it yields nothing. That's is what has been happening over the past few months. With bond yields hovering near to zero in U.S. and negative in Europe and Japan, investors have basked into the bull run glory of Gold.
* Currencies: Gold has a close relationship with currencies, especially the U.S. Dollar. As a rule, when the value of the U.S. Dollar increases in comparison to other currencies around the world, the price of Gold tends to fall in U.S. dollar terms.
* Short term movements: Finally, like any other investment asset, Gold also sees short term movements in prices driven by tactical flows and positioning in the derivatives market.
The world we live in has changed drastically over the past year with the pandemic causing both fear and grief. During such times, the need to hold relatively stable safe assets becomes even more critical. Thus, Gold can play a vital part in not just preserving wealth during such times but also benefit from it through longer-term price appreciation. Unless a vaccine emerges quickly, central banks stop printing money frantically and real interest rates start rising again, it is difficult to ignore Gold as an essential portfolio diversifier.
Above views are of the author and not of the website kindly read disclaimer