The golden era for yellow metal is here to stay

The first half of the year 2020 turned out to be a solid one for gold investors with the yellow metal offering double-digit returns. While prices of gold in the international market soared 16 per cent, MCX gold gained by around 23 per cent in the same time frame.

Although international markets and Indian gold prices move in tandem, the rupee depreciation of around 6 per cent boosted the returns of gold back home.

During the past three decades, gold has outperformed risk assets in nearly every single market downturn and the same thing continued during the COVID-19 pandemic, reinforcing the charm of the yellow metal in the times of uncertainty.

Central Banks add gold in these uncertain times
Gold has a special place in the coffers of the central banks and this principle is applicable to every central bank across the globe. The key guiding principle behind the allocation of gold as a part of the central bank portfolio is constructed according to three guiding principles of safety, liquidity and return.

Covid-19 pandemic has given enough reasons for the central banks to accumulate gold. Amid heightened volatility and uncertainty, globally central banks’ gold reserves grew by 145 trillion in Q1, 2020.

Due to the pandemic, the safe-haven demand for gold has increased and is visible in the rise in gold ETF holdings in the first quarter of 2020. Gold-backed ETFs (gold ETFs) attracted huge inflows (+298 trillion), which pushed global holdings in these products to a new record high of 3,185 trillion.

The pandemic slashed jewellery demand as governments across the globe imposed lockdown measures. Demand fell to lowest on record, led by a 65% decline in China – the largest jewellery consumer and the first market to succumb to the outbreak. (Source: World Gold Council)

Deeper Recession on cards
The pandemic has caused deeper damage to the world economy than first thought as IMF has said in its recent update. On 24th June 2020, IMF said the 2020 global output will shrink by 4.9%, compared with a 3.0% contraction predicted in April, when it used data available as widespread business lockdowns were just getting into full swing.

The IMF views the current recession as the worst since the 1930s Great Depression, which saw global GDP shrink 10%, however, the $ 10 trillion in fiscal support and massive easing by central banks had so far prevented large-scale bankruptcies.

What next?
With the global output set to contract and the economies in a deeper recession than most anticipated, gold as an asset class is a safe bet for investors across the globe. Although, the physical demand has declined drastically due to the restrictions and lockdowns, the activity of global central banks and their net purchases of gold signal that uncertainty will continue for most of 2020.

The investment demand as seen in the net additions of ETF holdings also signals that gold will shine for a much longer time even if the pandemic is under control.

We see gold prices in the international markets to move higher towards $ 1,850 in a month time frame while MCX gold prices might move higher towards Rs 50,000/10 gms mark. Till then keep buying gold, if not in physical form, but in digital form.

(The author is AVP Research Non-Agri Commodities and Currencies, Angel Broking)