Pandemic induced gold prices
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Pandemic induced gold prices

Post by on Friday, August 13, 2021

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Gold is sometimes referred to as a "safe-haven asset" since it has served as a store of value for thousands of years, albeit keeping its purchasing power. Simply put, the price of gold remains unswerving even while the price of everything else fluctuates. To make it simple safe-haven asset is one that is negatively correlated or uncorrelated with another assets and that too particularly during the crisis period. 
 
Gold's cogency as a safe haven was put to the test during the COVID-19 epidemic. On a global scale investors and central banks had active trading sessions in the bullion market. Amid the global financial meltdown gold underwent substantial market disruption and reached historic all time high price of Rs 56,000/10 grams in August. Falling government bond yields, supply reduction, currency weakness, excessive stimulus packages, and high levels of geopolitical uncertainty were the main factors that made gold to thrive.
 
The fiscal expansion that resulted in low interest rates reduced the opportunity cost of holding gold over rival assets such as bonds and fiat currencies resulting in higher investment flows towards gold. Precisely, during pandemic when interest rates decline people don't get good returns on their deposits. As a result, they are more likely to break their deposits and buy safe-haven assets like gold thereby increasing demand of gold and also the price.
 
Further, the reduction in supply of gold also led to the increase in prices of gold. The reduction in supply of gold is attributed to pandemic-related disruption to mine production and travel restrictions that prevented access to mines. China being the largest producer of gold, the lockdown in the country resulted in the cease of gold mining operations thereby reducing the supply of gold. Other countries like Canada, Mexico, Peru, and South Africa also forced their mining operation to be scaled back or completely closed thereby reducing the supply of gold. With demand for the gold increasing and supply reducing, the price of the gold shoot up.
 
Since, the outbreak of pandemic the Indian Rupee (INR) has depreciated sharply against the major currencies of the world including US dollar. Currently, the exchange rate of INR is quoted 75 against US dollar. Since, India is the largest importer of gold, the depreciation of INR against US dollar has caused the gold prices to rise in India. Further, the decision by Reserve Bank of India to allow the loan repayment moratorium to the borrowers and the economic stimulus package by Government of India infused liquidity into the economy. However, this infusion of liquidity into the economic system results in having investors with more money to invest, but since stock markets are volatile and interest rates are falling, people tend to invest into gold thereby surging the demand for gold and the increase in price for gold. 
The rising geopolitical uncertainty has also contributed to the rise in gold prices. The economies worldwide are tempted to erect more trade barriers in wake of the pandemic. This would slow down the economic progress and increase uncertainty. The increased uncertainty will increase the demand gold and thereby increase its price. As we know that there are no bull runs in the financial markets that can last forever, the gold markets will stabilise with gradual rollout of vaccination programmes worldwide and easing in pandemic. 
 
 
(Author is Assistant Professor, NIT Srinagar. Feedback: Nufazil.ahangar@nitsri.net)
 

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