The crisis commodity & a safe-haven asset

Gold prices in India touched a record high of ₹48,871 per 10 grams on Wednesday with the local gold futures gaining 25% in 2020 so far, as investors opt for safe-haven asset amid the global crisis.

To count on

Safe-haven assets are investments that investors turn to during times of market volatility and instability as they expect the asset to retain or gain the value during times of turmoil.

Gold has always been a go-to investment during times of uncertainty or economic downturn as because of its history of holding its value, given that, is not tied to any government or currency and does not bear political or credit risk. No wonder, why it is termed as a safe-haven asset as well as a crisis commodity.

Into the reserve piggy

According to the World Gold Council (WGC), India is among the top 10 nations in gold reserves. The country is among the largest consumers of gold with many households relying on physical assets like cash and gold.

Gold exchange-traded funds (ETFs) have also been gaining traction amid pandemic as it attracted ₹815 crore inflows in May amid pandemic.

The central bank is also a significant holder of gold along with the currency. Data showed that the Reserve Bank of India bought 40.45 tonnes of gold in the financial year 2019–20, taking its total holdings of the yellow metal to 653 tonnes as of Q1 2020. More than half of the central bank’s total gold holdings are held overseas while the remaining gold is held domestically, the RBI stated in its report.

It is not considered a good sign for the economy when a central bank looks to sell gold as it indicates the health of an economy. The RBI had to pledge 47 tonnes of gold with foreign banks during the economic crisis in 1991 to raise money as it struggled to finance its essential import bills. The selling of gold also indicates the central bank’s attempt to raise resources in crucial times.

Price variations

The increase in demand during crisis times leads to an increase in prices. Gold prices also automatically start rising when the central bank of a country starts holding the gold reserves. Currency movement also drives the price of gold. A strong dollar tends to keep the gold prices low and vice versa.

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