The unprecedented upward movement in gold prices is certainly baffling the common man and the market exports alike. The ubiquitous yellow metal uses range from a milk man’s wedding to the crown of the queen.
India is the second largest consumer of this precious metal next only to China. But, the domestic demand for gold has substantially come down due to demand compression induced by the Covid-19 crisis. Still the gold is very hot. This remains the perplexing question.
There are three kinds of gold supplies in the market. Firstly, the mined gold supply which has almost come to nil in India. Globally too, there is a very little supply of gold coming from mines.
In the last two decades, the mined gold supply has increased by only 1.6 percent. The other two are the central banks releasing their reserve gold into the market and the recycled gold coming into the market from the household possession.
Thus, there are structural supply constraints in the gold market globally making it the precious metal. The gold has given a cumulative annual return of over 14 percent since 1973, according to the market estimates.
But, the demand for gold in the world has increased resulting in higher gold prices in Indian domestic market as most of the gold sold in India is essentially imported. There are several factors that led to the spurt in global demand.
As the covid-19 induced global economic crisis looms large, the investment demand for gold has risen. The gold is highly sensitive to global economic trends. Gold is often perceived as safe haven resulting in higher demand during economic uncertainties.
The confidence in dollar at least in the short term is waning. The Dollar index comparing its value to the other global currencies slipped by 9.3% in the recent past.
The self imposed moratorium on global leadership by Trump led United States is resulting in dollar supremacy losing out. This may not be a long term phenomenon. But, it is contributing to higher demand for gold globally.
The other investments portfolios like the stock markets, real estate etc., do not show any promising returns. The bank deposits, the preferred choice of those who lack risk appetite, are yielding negative real return on investment. The uncertainties surrounding the trajectory of Pandemic has accentuated these trends cumulatively contributing to higher gold prices globally.
By — Prof K Nageshwar
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