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Much before Covid-19’s impact reverberated across economies and led to a crash in global stock markets, gold prices had started their upward glide since May 2019 to culminate into a nearly 40 per cent jump in less than a year, from $1250 (an ounce) to around $1700 (an ounce) plus now. The present gold prices in India are even higher, as they jumped from around Rs 32,000 per 10 grams to nearly Rs 46,800 per 10 gram during the same period, a nearly 45 per cent return.
Since gold is mostly imported commodity into India, the depreciation of the rupee vis-a-vis the US dollar of around 7 per cent since last September pushed the gold prices in India even higher. The Rupee on Wednesday closed at a new record low of Rs 76.86 to a dollar, from Rs 76.44 Tuesday.
Last year, there have been intermittent reports based on economic indicators suggesting that the US economy could enter into recession after a record 11 years of economic surge since the global financial crisis of 2008. This expectation of recession sowed the seeds of the gold rally, and the Covid-19 impact, which has virtually led to a shutdown of major economies across the world, added momentum to the rising gold prices as a major global recession now looks certain. The nearly 40 per cent crash in benchmark equity indices in the US and India, forced the US Fed to announce a record amount of liquidity injection and bond buying programme of more than $3 trillion, and the promise to do more. On March 27, the Reserve Bank of India too cut its key policy rate by 75 basis points and announced liquidity injection of Rs 3.74 lakh crore in the financial markets. Any expansion in the paper currency tends to push up gold prices. Apart from this, major gold buying leading central banks of China and Russia over the last two years supported higher gold prices. While stock prices have risen over 20 per cent from the March crash levels, supported by record easing by the central banks, gold has resumed its uptrend after falling initially from $1700 an ounce on March 9 to $1450 on March 20. This happened as an extreme reaction of investors to move towards cash.
While gold by itself does not produce any economic value, it is an efficient tool to hedge against inflation and economic uncertainties. It is also more liquid when compared with real estate and many debt instruments which come with a lock-in period. After any major economic crash and recession, gold prices continue their upward run. Analysts in market feel that gold could now overtake the previous peak of around $1900 per ounce. The empirical findings suggest that gold prices fall with a rise in equity prices. Gold prices also move in tandem with heightened economic policy uncertainty, thereby indicating the safe haven feature of the asset, the RBI said in its latest Monetary Policy Report. After the collapse of Lehman Brothers in September 2008 in the US, which led to a world wide economic crisis, gold prices jumped from around $700 an ounce in October 2008 to peak at around $1900 an ounce in September 2011. In the next four years, gold was on a steady decline and crashed to nearly $1000 an ounce in December 2015. Between 2015 and 2019, gold was in a range of $1000 an ounce and $1350 an ounce, after which it started its steady run.
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Given the economic uncertainty, gold is expected to touch a new all time high, which will be over $1900 an ounce. In India, the prices will also be supported by any further weakness in the Indian rupee. Any sudden sale of gold holdings by central banks to tide over the economic crisis, and crisis in other risk assets prompting investors compensate their losses through sale of gold ETFs (exchange traded funds), are the key events could stall the gold rise. For this year, the International Monetary Fund projects growth in advanced economies at -6.1 percent, while emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent excluding China.
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The adverse economic impact of Covid-19 is expected to linger on for much longer — with comparisons being made to the great depression of 1929 in the US. As an when economic recovery picks up pace, which is now expected in late 2021 only, investors will start allocating more funds to risk assets like stocks, real estate and bonds and pull out money from safe havens such as gold, US dollar, government debt and Japanese yen. As per historical trends, when equity and risk assets start an upward trend, gold typically falls significantly as was the case from 2011 till 2015.
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