India is one of the world’s largest consumers of Gold. It accounts for one-fourth of the total physical demand for gold in the world. Typically in India, gold has more facets. It is not only considered as an asset, but people in India buy a lot of gold as jewellery or gold bars for converting to jewels when needed. Any marriage or festival makes buying of gold mandatory in households.
Gold as an investment option is considered safe. The year 2020 was a major challenge to the business environment with the global fight against the deadly virus. While it did have an effect on all aspects of life, we are going to look into the impact of covid on gold prices.
The following article summarises the factors that affect the price of gold. There are various factors that affect the price of gold including the gripping pandemic. Of all, let us first look into the covid impact on gold prices.
What is the Impact of Covid on Gold Prices?
Covid19 and Gold Price
The gold price soared to a great extent when the world was grappling against coronavirus. The year 2020 was a major hit to the world economy. Most of the countries saw the falling value of their stocks and a dull business climate. In India, gold hit an all-time high of Rs.58000/10gms in the year 2020. With its great returns, the covid impact on gold prices can be seen as an advantage.
While the growth was 22% in 2019, it rose to 28% in 2020. Among all the assets gold gave a better return even during the covid 19 crisis. Real estate and other types of stocks did not see sunshine during the pandemic period. Investors who held these assets looked for safer opportunities. It is not to be forgotten that gold demand saw a historical low during 2020 in 26 years. But during the latter half, it rebounded and this is the nature of gold.
The bank deposits as we can see gave back only 4.5-5% in the previous year. Compared to the rate of inflation, this interest rate does not travel parallelly. So people prefer investing in gold in any one of its forms.
Virus Situation at the Global Level
The global economy is having a tough time with recovery after the pandemic hit them severely. Many countries saw a blow in various sectors and this has led to an overall sluggishness in the growth of the economy. 2021 can see a sustained break-in that can help push the global price of gold.
To see how far gold prices will be in 2021, we can take the aspect of liquidity that central banks across the world are trying to provide. Like the previous year, even with the impact of covid on gold prices, it can continue its uptrend due to the act of banks that want to add money to the economy. They want to fuel economic growth. This liquidity growth can be a great factor for gold prices to increase. It will improve the strength of gold going forward.
Lockdown and the sudden onset of the pandemic did make gold demand contract a little. But still, it proved to be a better and in fact safer alternative to other assets. After some initial hiccups, the third quarter of 2020 saw a huge demand for gold leading to its price rise. More people started to invest in gold.
Vaccines and Gold Prices
Leaving other things aside, what the global community desires now is to get rid of the Covid 19 pandemic, and vaccines are seen as the only course for this. This can be a major game-changer in the price of gold. We can easily observe the vaccine’s role in the covid impact on gold prices.
If the pace of the vaccination program picks up, there may be a small reduction in the price of gold. People will look at other stocks with optimism as the markets will stabilize following a massive vaccination drive. But it seems to be a long way to go. With a big population as a target, this process will take time and until such time, gold stands to gain. Even though the impact of covid on gold prices will not vanish overnight, gold will steer clear in 2021 also.
Gold will be buoyant in 2021 and as per forecasts, it may see a rise of more than Rs.60000/10gms. This can be an increase of about 25%. Analysts have a positive opinion post covid first wave and we can see how gold is going to outperform other assets in 2021. There will be an increased customer demand in India that will lead to a rise in prices. When compared to US Treasury bonds, gold is seen as a favourable option as the interest rates in countries like India remain lower.
What are the Other Impacts of Covid on Gold Prices?
Demand and Supply of Gold
The covid impact on gold prices can be observed in the demand and supply of gold since this is one of the important determiners of the price of gold. Demand and price are directly related which means, the increase in one will lead to an increase in the other.
We all know that gold is one asset that never loses sheen. It is an asset that is always in demand. The form in which it is bought may be different but the want remains. Particularly in India, it can be seen as a mixed factor with the practices of people. Due to culture and tradition, the demand for gold in the form of jewellery is ever-increasing only. Many others buy it as an investment to be used when the need arises. Markets have seen the arrival of various other precious metals, but demand for gold did not see a fall due to this. During festivals and wedding seasons, the price goes up more than usual as the demand is more in such times.
The price of gold does not fall because of the increase in supply. Gold is not consumed as is the case with some other commodities like oil. It remains in some form or the other and also more gold is mined leading to an increase in supply. But the price of gold remains increasing irrespective of this.
Inflation and Interest Rates
There is great volatility in the financial market of the country. When there is any economic disturbance stock prices tumble and sometimes plummet. This is with regard to other stocks like shares and securities. Investors are always worried about this situation. They look for some alternative ways that offer a safe investment.
Precious metals like gold are resistant to inflation because their value is not based on the paper currency. Inflation is the rise in the price of everything which ultimately devalues the currency. Simply put, your money can buy less than it could before. There is an inverse relation of inflation with gold. That is, when the currency value falls, the price of gold rises. Investments in gold are always treated as a hedge against inflation. When other investments fail to generate income due to the devaluation of the currency, gold pays off well. D
Due to this reason, investors always diversify their portfolios to include gold as a part of their investments. This can also be considered as one of the impacts of covid on gold prices.
Gold appreciates over time but it does not yield any interest like other assets. So when interest rates tend to increase demand for gold starts to reduce.
What are the causes of inflation?
- In a growing economy, employment opportunities increase. This leads to more purchasing power of people. This will increase the demand for products and services. When demand cannot meet supply, the prices tend to increase. This causes inflation. There is more spending by consumers and this is called demand-pull inflation.
- An increase in the money supply also leads to inflation. When the government prints more currency notes, there is more circulation of money in the economy. This will lead to an increase in demand and again an increase in the prices of commodities. This again is demand-pull inflation.
- Government regulation in the form of increased taxes is passed on to the ultimate consumer in the form of an increase in the product price. This increased price is a result of cost-push inflation.
- The value of the US Dollar also is a reason for inflation. When the value of the dollar dips in relation to the rupee, it has less purchasing power.
US Dollar
Gold and US Dollars have an inverse relation. When the value of USD weakens against other currencies, for example against Indian Rupee, it increases the demand for gold. An increase in the demand for gold increases the price of gold. When the value of the US Dollar falls, people are on the lookout for alternative investment sources that are lucrative too. This can be said of gold and so people shift to buying more gold.
Sometimes it may be possible for the US Dollar and price of gold to increase at the same time. It is found in such times when there is a crisis in any other country and people consider both USD and gold as investment options. Gold always has inherent value due to its limited availability. This helps it to remain stable when other stocks are nosedive. The US dollar index is a major component of the covid impact on gold prices.
The rupee-dollar equation also has an effect on the price of gold in India. Since gold is mainly imported, we can see an increase in the price of gold when the rupee weakens against the dollar.
Geopolitical Factors
In any period of geopolitical trouble, gold performs well. Gold attracts everyone more than the rest of the assets. During a crisis situation, the value of other assets falls down to a great extent. There is a negative impact on such occurrences. But these things have a positive impact on the value of gold. People resort to gold as a secure investment during troubled times.
The price of gold, even if it does not soar greatly because of the turmoil, continues to remain stable. Gold is called a crisis commodity because people believe in gold during a crisis. There is an increased demand for gold and thereby an increase in gold prices.
As we have seen above there are various impacts of covid on gold prices. Some are external and some internal. Some of them are beyond our control like the coronavirus situation. Gold continues to glitter, no doubt surpassing all these factors. For any investment decisions look into various factors and analyze well before you plunge in. Your financial goal, risk, and the mix of stocks in your portfolio all go to decide on your investments in gold.
You Might Also Like: Gold funds and their future in the year 2021
FAQ
Is 2021 a good year to buy gold?
If you are planning to hold gold for a medium to long term, then buying gold can bring positive results for you. Gold prices are expected to rise high in 2021 given the present situation of low interest rates and the external economic factors.
Why is an investment in gold preferred?
Gold is an all-time asset. It does not lose shine even in times of adversity. It is taken as a resort to hedging inflation. This can be a safe asset when all other types of assets fail to deliver. Moreover, in countries like India, investment in gold is mostly preferred for various reasons related to culture and practice.
The price of gold never falls, is that true?
Not really as gold also tends to react to economic and other conditions affecting the country. While many favourable factors are stimulating the price of gold, some of them pull it down too. Demand can be one factor. When other assets deliver very well, people stick to them as there is continuous earning in them in the form of interest. But gold can only be held for the long term and redeemed once when needed. In this case, gold prices will fall.
What are the ways I can hold gold?
Gold can be held in ways other than physical form. They can be held as Gold ETFs, Gold Mining Stocks, and Gold FOFs. All these are gold held in electronic form.
What is the relation between the dollar and gold?
A strong USD will lead to low gold prices and vice versa. It has an inverse relation to gold.
