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Brain-booster / 28 Aug 2020

Current Affairs Brain Booster for UPSC & State PCS Examination (Topic: Gold during Pandemic)

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Current Affairs Brain Booster for UPSC & State PCS Examination


Topic: Gold during Pandemic

Gold during Pandemic

Why in News?

  • After over nine years, gold prices hit more than Rs. 50,000 per 10 grams in India – the world’s second-largest gold consumer after China – as a host of factors like global uncertainties triggered by Covid pandemic, weak dollar, low-interest rates and stimulus programmes have increased the appetite for gold.

Reasons behind Rise in Gold Price

  • Gold had a remarkable performance in the first half of 2020, increasing by around 25 per cent from its low in March and significantly outperforming all other major asset classes.
  • Though equity markets around the world rebounded sharply from their March lows, the high level of uncertainty surrounding the COVID-19 pandemic and the ultra-low interest rate environment supported strong flight-to-quality flows.
  • Like money market and high-quality bond funds, gold benefited from investors’ need to reduce risk, with the recognition of gold as a hedge further underscored by the record inflows seen in gold-backed ETFs. Gold prices in India are dictated by international prices.
  • Many gold analysts have now revised their price targets saying that prices could go up to Rs 65,000 per 10 grams in the next 18-24 months. Analysts are bullish as the fundamental factors like lower interest rates, negative rates in some economies, enormous amount of liquidity and expanded fiscal balance sheets of governments which are trying to push growth amidst COVID-19 are expected to dictate the price trend.

Gold: A Safe Haven

  • Gold – an integral part of wedding ceremonies in India — is traditionally used as a hedge against inflation and considered as a safe haven for investors during periods of uncertainties.
  • Whenever stock markets, real estate and bonds fall across the world, investors turn to gold to park their funds.
  • The fall in the value of other asset classes and global uncertainties in the wake of COVID-19 helped gold climb to a record high.
  • A key factor behind this robust performance is that the supply growth of gold has changed little over time – increasing by approximately 1.6 per cent per year over the past 20 years. In contrast, fiat money can be printed in unlimited quantities to support monetary policy, as exemplified by the Quantitative Easing (QE) measures in the aftermath of the global financial crisis.
  • Gold, established as an investment, a reserve asset and an adornment, is highly liquid, no one’s liability, carries no credit risk and is scarce, historically preserving its value over time.
  • With prices on the rise, investors have embraced gold in 2020 as a key portfolio hedging strategy. Regardless of the recovery type, the pandemic will likely have a lasting effect on asset allocation.

India’s Hunger for Gold

  • World Gold Council (WGC) has estimated that households in India may have piled up around 24,000-25,000 tonnes of gold.
  • Various temples across the country also hold sizeable gold holdings.
  • The Reserve Bank of India bought 40.45 tonnes of gold in the financial year 2019-20, taking its total holdings of the yellow metal to 653.01 tonnes.
  • While prices had shot up, economic slowdown and the lockdown triggered by the COVID-19 pandemic hit the demand for the yellow metal. As a result, demand for gold fell 36 per cent to 101.9 tonnes during the January-March quarter of 2020 as compared to 159 tonnes in the same period of last year.
  • India’s gold demand for the full-year 2019 was 690.4 tonnes compared to 760.4 tonnes in 2018, down 9 per cent, according to WGC data.
  • However, around 120-200 tonnes of gold are estimated to be smuggled into India every year. The government last year hiked the import duty on gold to 12.5 per cent.