Safe bet: Five reasons that will lead gold to all-time high price

Gold price hit $1800 in New York's Comex Futures and appear headed for an all-time high level of $1900 in the international market, lifted by investors seeking a safe bet as the world battles coronavirus pandemic .

In India, prices calculated with 3 per cent Goods and Service Tax (GST) crossed Rs. 50,000 per 10-gram mark. Silver in Futures on MCX is trading at Rs 50,300 (without GST). In 2011, gold reached above $1900 and then fell sharply to consolidate at lower levels for years after falling to near $1,000. Gold usually has a price cycle of 8-10 years and after consolidating for years it has entered a bull cycle.

“Gold continues to have plenty of upside from current levels. We expect prices to come close to the 2011 peak of $1,921, although that level may not be breached this year," said Metal Focus, a London-based bullion and metal research firm.

"This may not to be a straight line rally and there will be periods of liquidations which will potentially take it to levels as low as $1,600. Investors should buy at such. That will make such dips short lived. Overall, we forecast the gold price will average $1,700 in 2020, up 22% year-on-year,” said Metal Focus.

Gold averaged $1,647 per ounce in 2020. The price rally this year has made Indian investors holding gold for the last 12 months richer by Rs 36.5 trillion. In the last 12 months, gold price in India has increased by 43 per cent to trade in the physical market at around Rs 48,600 per 10 gram. Indian households supposedly hold 25,000 tonnes of gold valued at Rs.121.5 trillion, or almost 60 per cent of India’s GDP.

Market players and researchers are banking on five factors for a gold rally:

• After the US Federal Reserve started cutting interest rates, gold prices started rallying as bonds attractiveness started falling.
• The trade spat between the US and China added fuel to the gold rally. The price was around $1200-$1300 little over a year ago. That situation is still not settled.
• The Indian government increased import duty on gold from 10 per cent to 12.5 per cent in July 2019, resulting in an immediate increase in cost of imported gold.
• The Indian rupee started depreciating against the US dollar. The rupee has depreciated 6 per cent this year, resulting in gold price hike of similar proportion in last six months apart from overall price rise of gold in international market. In Mumbai’s Zaveri Bazaar gold market, price of the yellow metal in the last six month has increased 24 per cent. On Tuesday, standard gold of 995 purity closed at Rs 48,365 per 10 gram.
• US trading in Comex gold futures crossed $1800 per ounce Tuesday night and gold spot price hit $1789 per ounce: the highest in eight years. Prices rose because of investors seeking safer assets as worries grow about the pace of US economic recovery due to new coronavirus cases US Federal Reserve Chairman Powell said last week that output and employment remain far below their pre-pandemic levels and cautioned that the outlook for the economy is "extraordinarily uncertain.”

There is a flip side to in investing in gold. In India and other markets, a decline in overall consumer savings is likely to undermine gold investment. Institutional investors may continue to buy SGBs.

India and China, the two largest consumers have seen sharp reduction in gold demand. India’s jewellery demand may fall 36 per cent to 348 tonnes this year, Metal Focus said.

In many emerging markets, the sale of old jewellery will be higher and that may hurt demand for fresh gold.