Gold has sparkled this year as investors globally flocked to the precious metal amid a COVID-19 pandemic that has hit economies hard and despite the recent correction, prices are likely to surge at least another 20 per cent in the next one year, as a sustainable economic recovery still remains to be seen, say analysts.
Typically, gold gains momentum amid economic crisis as investors rush to buy the safe haven asset. In India, gold prices had been on an uptrend since the last year as the economy slowed. Since, India imports much of its gold, a fall in the Rupee against the Dollar also adds to the price appreciation.
Globally gold prices scaled $1,900 per ounce this year, a level last seen only in 2011. In India, in early August, gold prices touched a record high of Rs 56,191 per ten gram. Prices have corrected since; on Thursday, on the MCX, gold traded in the Rs 50,300-Rs 50,400 range. Its still accelerated 30 per cent in 2020.
As the pandemic hit economies, countries across the world have announced trillions of dollars in monetary and fiscal stimulus packages. Interest rates in developed markets plunged to near zero. This availability of easy money has made its way into stocks as well as precious metals like gold. As a second wave of COVID cases forces a fresh round of lockdown and possibilities of another round of stimulus rise, the appetite for gold is unlikely to ebb anytime soon, say analysts.
“The nations with the highest number of death counts – US, India, Brazil, Mexico, France are forecasted to witness a total GDP decline of nearly $1.8 trillion resulting in a major setback for these economies. In an environment of economic distress, investors are seen moving towards safe haven asset-gold,” said Sugandha Sachdeva, vice-president—metals, energy and currency at Religare Broking.
Earlier this week, gold prices fell below Rs 50,000 after after pharma company Pfizer announced that its experimental COVID-19 vaccine was 90 per cent effective in preventing coronavirus. This in turn has fuelled a rally in stocks, which have hit record highs. However, as the economic uncertainty continues, any correction below Rs 50,000 should be used as an opportunity to accumulate gold, says Navneet Damani, vice-president, commodities research, Motilal Oswal Financial Services.
“If economic growth gets postponed by a few quarters, things could start to look weaker for equities and the money chasing the market will flock towards gold. Our rupee could depreciate another 5-7 per cent. The import duty structure is going to stay at 12.5 per cent. By next Diwali, gold should be around Rs 60,000-62,000 per ten gram,” he told THE WEEK.
In the next 18 months, gold prices in the country could touch Rs 65,000 per ten gram, while internationally Comex gold is expected to rise to around $2,450 per ounce, added Damani.
Religare also sees gold prices touching Rs 65,000 per ten gram from a yearly perspective.
“It is estimated that the Fed has injected more than $9 trillion into the economy with bailouts since September 2019 which includes about $2 trillion in rescue efforts in the form of a stimulus package to fight the mass distress in the economy. However, expectation of another relief package is around the corner, although quantum and the timing is still uncertain. Since gold acts as a hedge against inflation and uncertainty and it also shares an inverse correlation with interest rates, prices are likely to remain supported for an extended period,” said Religare’s Sachdeva.
Demand for the precious metal increases before festivals and weddings. Dhanteras, which falls on Friday, is one of the auspicious days to buy gold. With COVID-19 cases still rising in India, many people may be worried to step out into the markets and jewellery stores to buy gold.
Several platforms like MMTC-Pamp, Paytm, SafeGold, PhonePe among others now offer an option to buy gold in digital form. Several stock brokers also sell digital gold.
Paytm said on Thursday that it has seen two times growth in digital gold transactions in the last six months. Over 75 million customers have transacted 5,000 kg of gold till now on its platform, it said.
Advantages of buying digital gold are that you could buy it in very small quantities (as less as Re 1), its stored in secured vaults by the seller and is among the purest (999.9 purity).
Gold exchange traded funds and gold funds of asset management companies are another safe and low-cost option. Gold ETFs are typically backed by 24 carat gold and gold funds, usually invest in units of gold ETFs. Remember, you will need a demat account to buy gold ETFs, while gold funds can be bought without a demat account.
A better option also worth considering when buying gold could be the sovereign gold bonds (SGB), which the Reserve Bank of India launches at periodic intervals.
The eighth tranche of SGB is currently open for subscription. It will close on Friday. The issue is priced at Rs 5,127 per gram for those buying online.
“There is a dual benefit in investing in SGB as investors stand to gain 2.5 per cent per annum fixed interest on their investment and the rise in the value of gold once the bond is redeemed,” said Nish Bhatt, founder and CEO of Millwood Kane, an investment consulting firm.
But, only consider SGBs if you intend to invest in gold for the long-term. SGBs have a tenor of 8 years, with premature exit allowed after five years. Gold funds or ETFs, in that case, are more liquid as you could sell them at any point of time.