Warren Buffett once said, “Gold is a way of going long on fear.”
From geopolitical tensions to the current pandemic at hand, irrespective of the nature of hiccups plaguing the world at large, the yellow metal never fails to outshine. Since the pandemic’s onset in March 2020, gold prices have been surging northward and recently drifted towards the INR54,000 mark per 10 grams (according to Mumbai-based industry body India Bullion and Jewellers Association). Precious metals, like gold, preserve your purchasing power and help tide over uncertainties and economic turbulence. The uncertainties looming around financial markets and the unparalleled ability of gold to serve as a “financial buffer” further infuses shine in the yellow metal.
From loans secured against gold collaterals to temples bejeweled with humongous amounts of it, Indians are obsessed with the yellow metal. The extensive acceptability of gold across India transcends caste, creed and religion. This prized commodity plays a significant role in extending the ability to encash around the clock in India’s informal system of exchange.
India and its gold obsession
Over the years, India has come to be the second-largest gold importer although over the recent past, gold imports have dwindled on account of the pandemic. However the yellow bullion still maintains its northward spike. Quite surprising isn’t it? Well, it seems events unfolding lately have been favouring none but gold. Thus, it serves as an effective hedging instrument. The weakening rupee, liquidity crisis, business turmoil, widespread infections and fading hopes have consolidated gold’s position as an effective hedging instrument.
Moreover, as central banks across the globe cut interest rates and real interest rates move into the negative territory, investors are flocking to the yellow metal as the opportunity cost of holding other safe haven assets such as bonds increase with their falling yields. As the current pandemic appears to plague us for some more time before improving ahead, the backdrop for gold is likely to remain constructive and we could see more upside in the metal.
The bull run continues
Analysts worldwide expect gold to touch the Rs 60,000 per 10 grams mark once the festive season draws closer. Moreover, the recent move by the Reserve Bank of India adds further weight to gold’s bull run on account of an increase in the loan-to-value ratio for gold – from 75 percent to 90 percent.
Similar to the scintillating bull run in the yellow bullion being registered currently, we were witness to a similar scenario almost a decade ago. The period from 2000 to 2011 witnessed a tremendous surge in the value of gold. During this time period, the 2008 global financial crisis threatened financial markets, underscoring the importance of metals in such baffling times. Bearing in mind that gold serves as an alternate exchange medium and also as an effective hedging instrument, it shares an inverse relationship with the dollar. Just as demand dwindles, people scramble towards commodities to preserve their purchasing power and the yellow metal’s value skyrockets. Economic cycles are known for their crest and trough phases and each recession is followed by a boom.
Will the bull run sustain?
As markets revived and currencies stabilised in the latter half of 2011, gold underwent significant corrections – to the tune of 45 percent from its all-time highs. The bull cycle ranging from 2000 to 2011 delivered an over 20 percent compounded annual growth rate.
All events are unique but we are witnessing a similar plot unravelling currently. A volatile environment and myriad uncertainties loom large and these have once again overwhelmed the world – as was the case in 2008-09. And during such unprecedented times, metals prove their mettle.
We have already witnessed a massive surge in gold prices and analysts are going long on the metal. It seems the yellow bullion will be riding a bull run for a while now and India’s obsession over gold never seems to cease. However, given history tends to repeat itself, will we observe a significant price correction in the forthcoming years similar to the post 2000-2011 bull run? Brace yourselves!