GOLD GLITTERS!

The gold prices is increasing from few week from continuously indicates that gold is used as hedging instrument in all uncertain times. More people turn to invest in gold because of its enduring value. When there expected return on bonds, equities, and other market instruments decreases, the price of gold increases in the market.

The following is the trend of gold price in last 45 years. (Source: Bloomberg)

Interesting fact to notice is the price of gold was not volatile much from 1975 to 2005 and has increased suddenly from 2005 till date.  The only exception is of 1978 was because of increase in crude oil price and inflation, which again settled to the then market equilibrium price in 1980. The price started increasing from 2005 to 2011 due to increase in the commodity prices all over the world, with slight decrease in 2008 due to financial crisis, which is popularly known as sub prime crisis. The commodity prices at that time increased due to the inelastic demand and supply conditions in many commodities, which usually increases the price in the short run. The greater demand in India and china which entered the commodity market at that time in big way were the added reasons for the same.  So, what has been seen today for gold, is growing up in 2020, but still it is not high as in 2011, it may further increase, however unprecedented.

Gold prices are always driven by inflation, crude oil price, lower interest rate, , price of US dollar so on and so forth. All these variables affect the decision of investors those who by gold exchange traded funds (ETF) or gold futures.  However, in theory of economics there is no one answer that whether gold prices vary based on the fundamentals or by the speculators and ETFs.

So, the question is should you buy gold or not? Well, it is difficult to predict the assets price, the speculators always buy gold, but they don’t buy other commodities like sugar and cotton, the increase in uncertainty for longer time with Covid 19 will have upsurge in gold price in the coming days. More than 20% of the global GDP is operating in a negative interest regime and more than 7 trillion dollars of global debt has negative yield. The negative interest rate means that people will prefer to invest in gold, which is a worldwide trend now.  

The other side of the story is if the uncertainty and US dollar pressure is maintained, the gold price will keep on increasing.  But my opinion here is that the uncertainty is not going to continue for years together.  The gold is enjoying the news of bad news of market now. The problem is because few countries acted against COVID late, but all are taking seriously now.  The bad thing may not be worst further, world will not see deeper sea than what is seen now, the market is already very close to hitting the rock bottom, which must improve after reaching trough in all sense.

The other supporting factor is reasonably strong banking sector in India, which is backed up by majority government, which has taken strong steps for supporting the economy. Investors and consumers are optimistic that economy will bounce back after this pandemic. Also because of tug of war between china and US, foreign investors are looking India as one of the major supply chain destination in Asia. Investors are preparing for the future expenditure by purchasing the gold so that they can sell that in market whenever they require to invest. The banks are also the major buyers of gold to manage the increase in loanable funds demand after a certain period.  Hence, my suggestion is buying gold if you wish to use that for business person in the future, wait for some time if you wish to buy for retail or household reasons.