The cost of 10 gm of gold as on 1 st Jan for 24 carats was Rs. 39200. And the price as on 6th August is Rs. 57,590. The present bull rally in the gold seems to nullify various theories of experts. This point of mine will clear, as you will read in the article.
Gold has a negative correlation with the stock market. When the market is down, gold prices go up, thus providing a balance to your portfolio. There is a direct relation of gold with income levels. For a 1% increase in income, gold demand increases by 1%. However, with a 1% increase in the price of gold, the demand falls by only 0.5%.
Factors contributing to a surge in the price of gold
1. Hedge against economic uncertainty:
Geopolitical tension, trade war, plunge in economic growth has created a fear among investors. Investors have started shifting towards safe and haven opportunities i.e. gold rather than investing in risky assets. Gold bars and coins are on huge demand.
2. Gold mining activity:
The production of gold is badly affected due to the COVID-19 lockdown. Mining production falls 3% YoY in the first quarter, the lowest since 2015. Being mining activity hampered the supply of gold reduced, leading to a higher gold price.
3. Weak Indian currency:
India is one of the biggest importers of gold, and gold is valued in US dollars. The exchange rate directly impacts the price of gold. In the recent past, the rupee has fallen sharply, thus making gold more costly for us.
4. Stimulus package from central banks:
To protect the economy from collapsing, central banks have taken certain measures. Reduction in interest rates along with monetary packages has been injected to boost the economy. Cash liquidity in the market always acts as a catalyst for gold.
5. Pledge/sell gold:
Recession all around the world has led to job losses. People either sell or pledge their gold to generate cash. This scenario further amplifies the price of gold.
Will the gold price rise further?
Seeing the current scenario the gold price is likely to hike in the coming months. US elections, geopolitical tension, COVID related interruptions, the trade war will further act as an add-on to the price of gold. Gold is likely to touch Rs.65000 by this year-end.
Further to conclude would like to say, investors should always focus on asset allocation rather than chasing high returns. It’s advisable not to allocate more than 10-15% of your total investment in gold. Nothing is certain in this world. Play safe and stay invested.
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