Investors bullish on gold amid strong fundamentals, weak global economy

Gold price is likely to gain at least 12 per cent this calendar year on intermittent demand from institutional investors and safe haven buying from retail consumers, especially in the US where presidential elections are due in November.

Trading currently at Rs 48,041 per 10g after hitting a record high of Rs 48,380 per 10g on June 24, gold price in India is forecast to set a new record of Rs 54,000 per 10g in Indian markets by the end of this calendar year. The upsurge in the rupee value of gold would follow similar a move in its prices in global markets.

Gold has proved to be a safe bet against a slowing global economy due to the increasing number of coronavirus (Covid-19) cases and geopolitical tensions with China. Gold has proved to be the only asset class in these uncertain times to offer 23 per cent returns in the first half of calendar 2020 and a staggering 41.6 per cent in the last one year. Since its level of Rs 27,840 per 10g in January 2017, gold investors have become richer by 72.6 per cent.

“Fundamentals are currently in favour of gold prices. The Donald Trump administration in the US would try to capture citizen’s eyeballs with lots of luring pictures to revive the country’s economy which has been severely hit because of Covid-19 pandemic. The US financial markets might see fresh announcements to bring the economy back on track which may keep the dollar under pressure and support gold. Apart from that geopolitical tensions between China and the rest of the world also favour gold to hedge against economic downturn. Thus, we see gold prices touching Rs 54,000 per 10g with sharp volatility by the end of calendar 2020,” said Padmanabhan, managing director, NAC Jewellers, a Chennai based jewellery retailer.

Among other fundamentals, rising unemployment rates across the world is a major cause of worry. Despite falling imports into India and China, gold prices are moving up due to high investment and consumer demand in the US. A Metal Focus report suggests gold supply to remain lower by 5 per cent this year. Metal Focus, a London headquartered research firm, said gold price for 2020 would average $1700 per ounce against the first half average price of $ 1661.

In international markets, gold prices reported a gain of 16.7 per cent in the first half of calendar 2020. Gold price in the London spot market is currently quoting at $1771.3 an oz, a rise of phenomenal 47.6 per cent since October 2018 and 25.7 per cent in one year.

The jump in gold prices in the rupee value was sharper than in dollar prices due to the 8.6 per cent depreciation in the Indian currency during the last one year. On Friday, the rupee closed at 75.6 against a dollar compared to 69.2 against a dollar, a year ago.

Meanwhile, in a major worry for the global economy, the International Monetary Fund (IMF) has forecast the world and Indian economy to contract by 4.9 per cent and 4.5 per cent, respectively, in calendar 2020 due to the lockdown aimed at curbing the spread of the Covid-19 pandemic. This has taken a toll on crude oil prices, which have contracted by 40 per cent since January this year. 

Prithviraj Kothari, managing director, RiddiSiddhi Bullion, one of India’s largest bullion dealers, said, “Gold pries would remain highly volatile in the next six months as mining companies would start increasing supply to take advantage of high prices and hedging in the world markets to ensure returns.” He is, however, fundamentally bullish on gold.

Kothari suggests that consumers buy gold at any price available as the yellow metal is the only source with earn high long-term returns.

“Gold prices kept a firm trading range despite a rally in equity indices. The worries over record virus cases in the US and other parts of the world have kept risk premium high in gold prices. The US Federal Reserve’s new capital rules will put a cap on bank dividend payments as well as halting share repurchases until the end of the year, which also supported gold prices to trade firm,” said Tapan Patel, senior analyst (Commodities), HDFC Securities.

Silver prices also moved in positive territory and offered 28 per cent returns in one year. Silver prices are likely to move in tandem with gold in the future.