Gold – an integral part of wedding ceremonies in India — is traditionally used as a hedge against inflation and considered as a safe haven for investors during periods of uncertainties. Whenever stock markets, real estate and bonds fall across the world, investors turn to gold to park their funds.
The fall in the value of other asset classes and global uncertainties in the wake of Covid-19 helped gold climb to a record high. A key factor behind this robust performance is that the supply growth of gold has changed little over time – increasing by approximately 1.6 per cent per year over the past 20 years. In contrast, money can be printed in unlimited quantities to support monetary policy, as exemplified by the Quantitative Easing (QE) measures in the aftermath of the global financial crisis.
Historically we have seen falling interest rates have inversely proportional relationship with gold prices. To provide the stimulus to the economy, most Central banks reduced the interest rates to give boost to the economy. As interest rates fell, the investors had to move to asset class giving higher returns and gold is the obvious choice.
All the major Central banks had to print large quantities of currencies to support economic stimulus packages announced by various governments, there by increasing supply of money. On the other hand, Gold mining during this period severely got impacted because of lockdown in various countries. This created imbalance between demand and supply leading to increase in prices.
Gold, established as an investment, a reserve asset and an adornment, is highly liquid, no one’s liability, carries no credit risk and is scarce, historically preserving its value over time.
*Satyakam is a qualified Chartered Accountant, Cost Accountant & Company Secretary by qualifications. He has over 25 years of corporate experience in fields like Treasury, Accounting & Outsourcing Industry.