This year has been exceptional and we have seen it all. There have been uncertainties, travel restrictions, local lockdown and closure of sectors. These have been unprecedented times where markets have dipped significantly and precious metals have rallied meaningfully. Until now the world was of the opinion that the recession of 2007-08 was the worst of all things seen but COVID-19 has surely surpassed that any other events of the history.
In the past, central banks have turned to gold – universally known as the safe-haven asset. The precious metal has helped central banks tame the impact of negative sovereign bond yields and has acted as a source of value against deflation. It has also helped central banks reduce currency concentration within their portfolios. During the Covid‑19 pandemic, central banks have aggressively cut interest rates and dramatically expanded their asset purchase programmes. This has supported expansionary fiscal policies and pushed precious metals higher.
Top analysts in the country as well as the bullion king of India believes we all have seen that; gold has outperformed other assets in all macroeconomic regimes. Investors have shifted to gold amidst this turmoil. The safe haven asset has been every man’s favourite in this crisis.
In spite of these uncertain times, gold has been one of the few asset classes that has generated positive returns. And we expect this to continue further. Central banks have been consciously purchasing gold and increasing their reserves. They are using it as a hedge tool against inflation. Central banks have long been purchasing gold to reduce their dependency on other currencies within their portfolios, precisely the US dollar.
Allocation of funds in their portfolios grew larger which in turn declined US dollar foreign reserve currency allocations. The sharp fall in dollar liquidity at the height of the pandemic in March and April saw investors and official institutions focus their efforts on securing access to the world’s reserve currency.
For countries facing US financial sanctions, gold remains an attractive alternative. Hence major countries like China, Russia, Turkey etc were all focussed to increase their gold reserve and reduce their dependency on the US dollar.
Moreover, the extraordinary economic shock created by Covid‑19 creates an indeterminate stance that also affects gold. Midway through the year, there were signs normality was returning: travel restrictions were eased at home and abroad, people were encouraged to return to work, and positive case numbers across Asia and Europe fell. But this led to a second wave of infections which is expected to be even more harmful.
Nonetheless, the sustainability of recent price increases remains uncertain. But one thing is certain- the bright future for gold. Factors responsible for this bullish trend-
- The Fed’s policy framework
- New domestic lockdown measures are being imposed across Europe
- The US is unlikely to reopen its borders this year
- Continued market instability
- Growing uncertainty about the future shape of the global economy
- Sharp GDP falls,
- Negative bond yields
- Growing tensions between the US and China
- A protracted global health crisis
Prithviraj Kothari of RSBL believes that amidst all this uncertainty, only one thing seems certain: gold will continue to be an investor’s umbrella.