Gold prices in India have had a record run this week, hitting new highs. On MCX, April gold futures surged to a new high of ₹42,790 per 10 gram on Friday, gaining as much as ₹1,800 per 10 gram for the week. Silver futures on MCX also gained over 1% to settle at ₹48,376 per kg on Friday. The gains in precious metal in domestic markets reflect a rally in global markets. Here are five reasons why gold is rallying again:
1) Gold is up over 7% in global markets this year as investors worry about the impact of coronavirus on global growth. Gold is considered a safe-haven asset during times of economical and political uncertainties.
The International Monetary Fund has been warned that the coronavirus pandemic situation has already disrupted economic growth in China and a further spread to the other countries could derail a “highly fragile” projected recovery in the global economy in 2020.
2) Reflecting the trend in prices, investment demand for gold has also remained strong. Holdings of the world’s largest gold-backed that exchange-traded fund, as SPDR Gold Trust, rose 0.25% to 933.94 tonnes on Thursday. This is the highest holding in over three years.
Back in India, gold ETFs attracted an inflow of ₹200 crores in January, making it the highest infusion in seven years, even though the physical demand remained lackluster. This also marked the third consecutive monthly inflow in Gld exchange-traded funds (ETFs).
3) The rupee has also weakened against the US dollar to fall to about a one-month low of 71.66. The rupee is tracking weakness in other Asian currencies as a sharp rise in new coronavirus cases outside China sent investors scurrying to safer assets such as the US dollar. The greenback has gained versus some 30 major world currencies in the past month, coinciding with mounting concern over the outbreak’s economic impact. A weaker rupee increases the imported cost of gold in India. Domestic prices include 12.5% GST and 3% GST.
4) The surge in global prices has made some analysts turn cautious on equities. “Gold has crossed $1,600 per ounce which may be understood as a contra yardstick for equities. This likewise calls for caution for global equity markets, if the gold is to be considered as a barometer to measure the risk,” as says Jimenez Modi, the founder & CEO of SAMCO Securities.
5) Some analysts are betting that the US Fed may ease interest rates in the second half as the virus threatens the global economy. Lower interest rates boost the appeal of non-interest yielding asset classes like gold.
The minutes of Fed’s last month’s meeting showed policymakers remain generally upbeat about the economy even as they acknowledged an emerging risk from the coronavirus outbreak.