Gold is on a tear. In USD terms, it’s breached $4000 per troy ounce (1 troy ounce is 31.10 gms), and in Rupee terms, it is about 125,000 + for 10 gms. This year itself, Gold has given a return of over 50% and Indian housewives are beaming.The question on everyone’s mind is, what is causing this crazy price increase, and will the rally continue? Should we buy now, make a quick profit, and then exit?
We had covered Gold in our earlier blog here & & here.
We can pinpoint the causes, but whether the price rise will continue or not is anyone’s guess—the answer to whether the rally will hold up lies in its causes.
Gold has a 6,000-year history, so it’s not suddenly disappearing from our lives. Unless, like lab-grown diamonds,if lab-grown Gold comes up with all its properties, unlimited supply, it can drives down its price.
In any case Gold rally in the last two years can be traced back to geopolitical reasons. Central Banks buy USD as a reserve currency or purchase a large number of US bonds. Central banks hold a reserve currency to facilitate international transactions and minimize exchange rate risk. The U.S. dollar became the world’s primary reserve currency after the 1944 Bretton Woods Agreement.
Most of International trade is denominated in dollars, so when we import goods, we will need dollars. An importer goes to his bank to pay for his goods in INR, and that bank, in return, buys dollars from the market. Our Central bank supplies dollars or buys them from time to time to keep the exchange rate steady.
When Russia attacked Ukraine, the US froze Russia’s assets to penalise it. This made all countries sit up and take notice, worrying that if, for some reason, we displease the world, our assets could be frozen. That led to a search for an alternative to USD. The obvious answer was Gold—universally accepted store of value.
Central banks have been buying Gold coz the faith in currencies is shaken. The US was perceived to be the big brother politically, and the USD the stabiliser of world finances. With the Trump tariffs and the accompanying chaos, trust in the US has eroded. What happens? Flight to Gold.
Not only central banks, but also large institutions are buying Gold to stabilise and manage the risk. It may not have been to make a superb return, but collective buying has driven up prices and has actually benefited them.
Any asset that goes up very quickly will attract speculators. They have also jumped in which also results in prices going up.
People are losing faith in Western economies and their fiat currencies because these economies have run up very high levels of debt. They were already a deficit economy (the government’s expenses are higher than its income), and the COVID-19 stimulus has ballooned the debt.
If the country grows rapidly and the interest rate stays low, the debt can be repaid, but rates are rising to combat inflation. It’s hard for any politician to cut expenses and displease the public. The government needs to be in surplus to pay down its debt.
The USD has depreciated against the world’s currencies this year (not India, though), which is what the Trump regime wants. It helps them to become more competitive in exports. His tariff war, in principle, may not be wrong, but the disruptions caused by it may prove to be inflationary.
There are enough reasons for Gold’s rally, but we need to keep in mind that Gold has had a chequered past. It does go up in times of crisis, but it can have long periods of low performance. There is a perception that Gold never falls. That is not true.
Below is a chart similar to the one shared by Devina Mehra of First Global of prices of Gold in USD.
India’s INR has consistently depreciated, and that is also in Rupee terms, the return looks high. For eg if 10 gm is 1250 USD & INR is 84 to 1 dollar.
Then 10 gm would be 1250 * 84 = Rs. 105000
If the price remains the same at 1250 USD but the INR depreciates to 87, then the price of Gold would be = 108,750.
Will the rally last ?
Nobody knows. If you can know whether Trump will quieten down and not make the world nervous, When there is faith that there is order in the world the rally will lose its fizzle. It may thump down as quickly. The rally has room to move upwards due to global nervousness, making it seem like the only place to hide.
Should we buy at this price? It’s tough to tell. If you track flows very well, you may as well ride the momentum, but it’s very tricky bet. one thing is sure, it will be very volatile.
Our individual opinion is to hold on to Gold, and when you start getting rational statements from the US, sack it before anyone does. 😊
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