Commodity Commentary . Why gold matters during times of economic uncertainty

Since the start of this month gold prices have soared to multi-year highs, thanks to humongous economic uncertainties combined with ultra-loose monetary policies of various central bankers and stimulus packages of governments to arrest the catastrophic economic effects of Covid-19 pandemic.

For the yellow metal, it is clearly a liquidity-driven price boom having gained a whopping $150 a troy ounce in the last two weeks. To be sure, central bankers around the world are dropping interest rates and expanding liquidity like never before.

With US interest rate near-zero and the Federal Reserve deciding to purchases securities valued at about $2.3 trillion, easy money is once again seen rushing towards the haven commodity. As a result of highly accommodating monetary and fiscal policies, countries are carrying massive debt burden.

It is unclear as yet, how soon the pandemic will come under control. Already millions have registered for unemployment benefits in the US. This by itself creates uncertainties about the health of the economy. If uncertainties over containment of the pandemic continue well into this quarter, then the world is sure to slip into a disastrous recession. It may take many quarters of staggered growth for recovery.

Spurt in prices

No wonder, on Tuesday, gold climbed to $1,725/oz representing the highest level since November 2012. Inflows into gold ETFs are also gathering pace. On current reckoning, the precious metal is sure to make further gains in the days and weeks ahead as speculative financial investors are sure to take bullish bets on the metal which will propel it even higher.

The enervated physical demand in some of the world’s largest markets like China and India has had no perceptible effect on the market. Import into these countries has also slowed down sharply because of weak jewellery demand. Additionally, central banks, too, have reduced their gold purchases in the last quarter. If anything, some countries may even decide to sell gold to finance their debt. So, gold is now pure fund play.

Gold will continue to be in favour until confidence about global economic growth, in general, and growth in advanced economies, in particular, is restored; and excessive liquidity is wound back. This process is likely to take time — possibly several quarters — if one went by the experience of global financial crisis 2008 and its aftermath.

Along with gold, silver, too, has gained. It is currently trading at around $15.6/oz. Silver ETF inflows are also robust.

Indian scenario

Reflecting global trends and weak rupee, gold price in India has topped the ₹45,000 per 10 grams mark. At these levels, price is only notional. Physical demand has all but evaporated because of high prices and nationwide lockdown.

Rising joblessness and fall in incomes is sure to squeeze the already weak physical demand further. Gold imports in March reached an estimated low of around 12.5 tonnes. The situation is unlikely to change anytime soon. However, speculative bets on the commodity are rising. Scrap sales in the country are reportedly rising to new highs as sellers have never had it so good.

The writer is a policy commentator and commodities market specialist. Views are personal.

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