Renowned investor Warren Buffett once said,“Gold is a way of going long on fear.”
Historically, gold has been a highly valuable asset and a sought-after avenue for investment. This is because gold is a metal which proved to be abundant enough to make coins out of while at the same time being rare enough so that not everyone can produce it.
Apart from this, one of the most important physical properties of gold is that it doesn’t corrode, thus providing a sustainable store of value, it can also be melted easily and shaped into either jewellery or coins or a gold bar. Humans are physically and emotionally drawn to gold as an avenue for investment. Various cultures in all societies and economies have placed value on gold, thus perpetuating its worth.
Gold has been the medium of exchange worldwide since the dawn of trade. And till the 1930s, global currencies were backed by gold reserves and even today significant amounts of reserves are in the form of gold. In times of war and crisis people rush towards buying gold. This is because people consider it a safe form of investment and its demand naturally increases as confidence in other investment opportunities falls. And this could be called as a classic case of demand supply mismatch which drives the prices of the commodity to sky. Here, naturally, the demand for gold increases but its supply remains limited in nature and hence the prices advance.
Current global pandemic crisis of coronavirus (COVID-19) has crippled the economies worldwide since late February. The world is in a lockdown. All procyclical businesses have hit rock-bottom. Unemployment rates are drastically high. And those people who did not lose their jobs are confined to working from home.
In the month of May this year the unemployment rate in India was as high as 23.5% which means close to one quarter of 1.31 billion people were unemployed, and job losses due to covid-19 had contributed significantly to this figure.
Now let’s talk about the elephant in the room “GOLD RUSH!”. It has been a roller coaster ride for Gold investors in regards to prices of gold this year.
Let’s begin at the beginning. At the start of the year on 1st January 2020. The price of gold unaffected by any influence of covid-19 were at ?40,255.00 per 10g. [see Figure 1.1]
Then cut to 3 months later in the month of march gold was trading at ?45,750 per 10g. Later in mid-march when covid-19 cases around the world started rising and when markets went into panic the gold prices in India plummeted.
Now before understanding why did this happen it is important to understand the timeline for increase in covid-19 cases around the world but especially in Europe and America, which were considered to be the Global Hotspots for covid-19 cases.
On 13th March,2020, the number of new cases in Europe overtook those in China, and the World Health Organization began to consider Europe the active centre of the COVID-19 pandemic. Cases by country across Europe were getting doubled over periods of typically 3 to 4 days, with some countries (mostly those at earlier stages of detection) showing doubling every 2 days. By 17th March, all countries within Europe had confirmed cases of COVID-19, with Montenegro being the last European country to report at least one case. At least one death had been reported in all European countries, apart from the Vatican City.
Soon, all the countries started to initiate a nationwide lockdown. As on 17th March, on one side there was Italy, which had a little over 31,000 cases, and on the other hand in southern America, Brazil which by then had significant number of cases, declared a complete lockdown.
This led to the panic in markets where a sell trend across all asset classes including gold started taking place, because people started fearing that similar lockdowns would be initiated everywhere around the world, and people preferred to have cash with them because of heightened concerns over the economic toll of coronavirus outbreak.
Thus in just 15 days the gold prices plummeted by 9.85% from ?45,750 per 10g in the beginning of the month to ?41,250 as on 17th march,2020.[see Figure 2.1]
Amidst fear of rising cases, India initiated its first lockdown on 25th March 2020, and since then the number of coronavirus cases have only increased, and they have increased drastically. And due to this the price of gold has also seen a sharp upward rally. From ?41,240 per 10g on 17th March 2020 the price of gold has reached to ?50,120 per 10g as of 1st July 2020 which translates to an astronomical 21.53% increase in value of gold in just 105 days.
[see Figure 3.1]
So, to conclude we can say that gold has been tracking what has been proven to be fundamentally true for ages now, that in times of crisis people resort to gold as a “safe heaven” for investing their money. And due to massive demand, there is often huge surge in price of gold.
Currently there are 6,04,301 cases in India (As of 02/07/2020) and the trends show that the cases are likely to rise in future, even though at a slower rate. Hence we can expect the gold prices to maintain the surge trend for as long as the crisis doesn’t end.
By Akshil Jayesh Thakkar
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