Worried investors are rushing to buy gold as fears of a worldwide recession, sparked by trade wars and economic slowdowns in India and China, grow more real. Gold prices have risen by nearly 8 per cent in rupee terms since August 1, and by 17.86 per cent since January 1, this year.
Gold prices surged in the week gone by to Rs 4890 for 10 grams of 24-carat gold as investors scrambled to find safe havens to park their cash. Equity markets not only in India but worldwide went into a tailspin on mounting slowdown and currency wars fears after China let its yuan weaken beyond 7 to the dollar. The move was seen as a retaliation by investors to US President Donald Trump’s announcement that he would slap fresh tariffs on Chinese imports.
As the stock markets slid, the value of gold rose sharply. Spot gold went up over $1,500 per ounce, up from about $1,440 per ounce on Thursday.
Analysts point out that central banks, jittery about the state of their respective economies and in a bid to blunt the pain from the trade wars, have also been slashing interest rates. In the week gone by, besides the RBI, the central banks of New Zealand and Thailand have dropped rates.
Those who caught on to the boom at the right time including central bank governors can pop champagne in celebration. Central banks bought 374 tonnes over the first half of this year -- a record purchase by central banks for any first half since the turn of the century, according to the World Gold Council.
The RBI seems to have been among them. The RBI’s forex reserves data shows its foreign currency reserves in end-June stood at $400 billion. On August 2, it fell marginally to $399 billion, mainly because the rupee depreciated. In the same period, however, it's gold reserves increased by $2.2 billion to a total of $25.16 billion.
Goldman Sachs predicts that gold could rise to $1,600 per ounce. “If growth worries persist, possibly due to a trade war escalation, gold could go even higher, driven by a larger ETF gold allocation from portfolio managers who still continue to under-own gold,” Goldman analysts said in a note this week. “Gold ETFs have recently built momentum almost as strong as in 2016, and we believe that can be maintained in the short-term.”
This is, of course, an analysis for short-term investors, though there are contrarian views too which feel gold has peaked. Amit Banerjee, an independent investment banker representing East Asian funds, says, “The global slowdown fears have peaked as have gold valuations. However unless there are war-like skirmishes in West Asia or the sub-continent, I doubt if the gold value will go up too much.”
However, the question plaguing investment advisors has been whether gold earns an investor good returns over a longer period. Over a 20-year cycle, gold has increased in value by over 6.5 times. The BSE Sensex in the same period has, however, gone up 10 times.
“As an asset, I would say gold should form one cornerstone in any prudent investor’s portfolio, though not the only one or the overwhelming one,” said Sanjay Bhattacharyya, former managing director of the State Bank of India.
Investment advisors say the smart way to invest in gold, if one has an appetite for it, is to buy gold-backed exchange-traded funds (ETFs).
The World Gold Council (in the USA edition of its report) says that since the turn of this century, investment demand for gold has grown worldwide on an average by 15 per cent every year. This has been driven in part by the launch of easier ways of buying gold, such as gold-backed ETFs, where buyers do not have to keep gold at home, but can simply buy a paper that represents their gold purchase.
Gold ETF prices soaring all of a sudden
With gold prices rising in the wake of slowdown signals, trade wars and stock market volatility, India’s Gold Exchange Traded Funds (ETF) have become lucrative options, with returns this year looking extremely attractive.
The prices of most Gold ETFs on the National Stock Exchange (NSE) have risen by 16-18 per cent between April 1 this year and the end of trading on Friday. [CLICK HERE TO KNOW MORE]