Gold prices are making new records with every passing day. The precious metal (24 carat) Thursday inched up by Rs 225 to Rs 56,590 per 10 grams. It had closed Wednesday with an astounding gain of Rs 1,365. Weak dollar and concerns over economic growth worsened by galloping virus cases in the world are holding up international gold prices, as investors in western countries continue to put their faith in the yellow metal. Silver and gold have been the best performing assets so far this year with 40 per cent and 50 per cent returns, respectively and there is still a lot of upside. Ever since the outbreak of the pandemic, the price of gold has been relentlessly rising. There is a marked contradiction in the demand and price matrix, though. Demand for physical gold has slumped while its price has been escalating. Gold imports in the June quarter (April-June) saw a sharp plunge at 70 per cent to 64 tonnes—an 11-year low– as against 213 tonnes during the same period last year. What drives the current surge in gold prices? The demand drop is largely due to massive economic disruptions caused by the Covid-19. The pandemic broke out when the entire world was already in the grip of a global slowdown. Public demand has evaporated and so has consumption.
People’s incomes have drastically fallen. Job opportunities have gone through the window. Workers across industries and regions are struggling to live with truncated pay and job losses. In such desperate times, it is only natural that people hold on to whatever savings they are left with. Certainly not a time to spend on gold. Discretionary spend on gold, a major factor behind movement of gold, has come to naught. There is a drastic fall in demand for gold in China and India—world’s two largest gold consumers. However, the fall in demand for gold in Asia has been more than made up by a surge in demand in western countries. Investors in Europe and America are piling into gold as a safe haven in the pandemic-ravaged economy, helping push its prices. Influx into exchange-traded funds this year in Europe and the US are at record level.
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Although India is a major consumer of gold, its market is highly price sensitive. Buyers tend to shy away from gold whenever there is a markup in its price. The current slump in gold demand is largely due to its prohibitive prices. Moreover, repeated lockdowns/shutdowns in the country have ensured that businesses are shuttered and people stay inside. Shops have shut and malls have emptied. As regards lockdowns/shutdowns, there is no clear direction from the government. The pattern of lockdowns and shutdowns has so far been rather erratic. Shops and commercial establishments are a confused lot. The fluidity of the situation has forced them to shun planning. The sharp rise in Covid-19 caseloads in July and August has dashed hopes of an early reopening of the economy. The situations are likely to remain so in near to medium term. If the demand in India and China for physical gold bounces back, the price will further run up.
These are rather uncertain times for all stakeholders of gold such as traders, dealers, investors, artisans and consumers. With the discretionary spend on gold completely switched off, the yellow metal will have a troubled time ahead. The RBI Thursday raised the loan-to-value (LTV) on gold loans for non-farming purposes to 90 per cent from earlier 75 per cent. This would mean the same amount of gold can fetch larger loans when mortgaged with banks. This may not necessarily boost demand for gold in India as its current prices are already sky-high. At the most, this may raise short term liquidity for people holding onto gold. Gold will continue to shine amid slump.
