Gold surges amid gathering clouds

Gold price surged past the US$1900 level continuing its trend which has been intact since September 2019. While in the initial phases of the rally it was strengthened by the uncertainties around the global economy mainly emanating from the trade war between the US and China, and the reduction in the base rate in the US.

The recent rise in the price is attributed to the positive disposition to the metal from investors due to the pandemic and the related uncertainties. The pandemic has adversely affected the supply of the metal due to safety measures imposed in mines and factories. There was a fall in retail demand as the price of gold surged in many territories making it more expensive in some of the depreciating currencies.

The two main sources of demand for gold are the institutional demand and the ETFs, both of which remained robust throughout the last two years. ETF demand grew from 436 tons to 3000 tons over one year, almost 300% rise year-on-year. This means a rise in investment demand for the metal. Quite contrary to this, the physical demand for gold for industrial applications, jewellery, etc. showed slower growth.

This trend may be sustained for several reasons. The pandemic is yet to be contained and a vaccine for the same is yet to be confirmed. The contraction in the global economy due to the lockdown and the resultant loss of output and employment will add to the uncertainties and thereby the demand for the yellow metal. There is also a feeling that inflationary pressures may emerge over the next two quarters as recovery starts happening gradually, and this may further strengthen the demand for gold, and thereby, the prices.

The average price of gold for the rest of the year is expected to be somewhere in between 1700 to 1800 levels. It cannot be ruled out that there will not be any profit booking with gold at historically high levels. While the best support for gold prices is a weak dollar, a faster global economic recovery and rise in interest rates can effectively limit the advance in prices.

Read more on the August Navigator issue



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