Will the gravity-defying run of gold and silver last?
Gold prices are heading straight towards the sky.
Domestic prices of the yellow metal surged about 23% this year so far and as if
guided by a higher spirit, prices of 24-carat gold shot up to Rs 81,000 per 10
gm ahead of Diwali. In fact, according to the Indian Bullion and Jewellers
Association (IBJA), prices rallied nearly 30% in the past one year and if the
pace continues, they'll likely touch Rs 1 lakh by next Diwali.
Clearly, two factors are driving the price of gold. One, geopolitical tensions
such as the ongoing Russia-Ukraine war and hostilities in the West Asia are
adding to the safe-haven appeal of gold. Two, high demand, not just from
individuals, but from global central banks, who emerged as the primary gold
bulls. They have been buying pots of gold steadily since 2022, perhaps hoping
that this 'golden' policy of reserves will come in handy whenever the devil of
all geopolitical disorders unleashes trouble.
Incidentally, gold's fellow metal silver too has developed similar anti-gravity
properties. Unlike oil reserves or gold war chests, nations aren't into silver
stashing, yet prices are marching to the beat and have crossed past Rs 1 lakh
per 1 kg this week. Here too, the price rise is due to demand, again, not from
households, but due to industrial usage in advanced electronics, batteries,
solar panels, medical supplies and modern weapons besides others.
Adding to the demand drivers, the Russian government recently announced that it
would begin adding silver to its precious metal reserves and chances are that
other countries may follow Russia and consider building their own strategic
silver chests.
As for individuals, demand for the twin metals remains high both due to the
festive season and the forthcoming wedding season. Despite prices hitting
record highs, sales haven't slowed down, thanks to Indian households' tradition
of buying gold and silver coins and jewellery as a means of investment, and a
symbol of wealth and prosperity.
That
said, there's a noticeable shift towards investing in gold mutual funds and
gold Exchange-Traded Funds (ETFs), though physical gold reigns supreme.
Interestingly, gold ETFs beat returns from equities by a fair margin last year.
While investors of precious metals like gold and silver saw significant returns
of 39.7% and 44.3%, respectively, in comparison, Sensex and Nifty gained 25.1%
and 27.9%, respectively last year.
Currently, there are 17 gold ETF schemes, which have collectively added some
10.3 tonnes of gold to their holdings so far this year, taking their combined
gold holdings to 52.6 tonnes -- a 29% increase. Interestingly, retail investor
accounts in gold ETFs also increased by about 15 times over the last five
years. According to trade body AMFI, the total number of retail accounts in
gold ETFs stood at 48.4 lakh as on December, 2023. Despite 2024 having seen the
launch of only one Sovereign Gold Bond scheme, inflows into gold ETFs saw a
mind-boggling 152% increase at Rs 7,367 crore from Rs 2,919 crore in 2023.
Gold is among the best long-term assets offering both safety and attractive
returns to investors and so the rising retail demand is understandable.
Likewise, the central banks' craze for gold too is a time-tested practice and
they are the largest gold hoarders with global reserves topping 36,699 metric
tonnes at the end of 2023, or 17% of all the gold ever mined.
Wars often play an important part in gold price movements as was seen during
the 1970s and early 2000s and is also being seen now. As governments increase
deficits to finance wars, and increase the monetary supply, it drives
safe-haven demand from both central banks and investors. Right now, an
increasingly complex geopolitical and financial environment is making gold
reserves management relevant more than ever.
Following the 1997 Asian financial crisis and the 2007-08 financial crisis,
central banks have been net buyers of gold. According to World Gold Council
estimates, the top 10 official buyers of gold between 1999 and 2021 represent
84% of all the gold bought by central banks. Russia and China -- arguably the
US' top geopolitical rivals -- have been the largest gold buyers in the last
two decades. Russia, in particular, began stockpiling gold after being hit by
Western sanctions following its annexation of Crimea in 2014.
As tensions rise in West Asia, central banks are loading up, yet again. In
2023, they added 1,037 tonnes of gold -- the second highest annual purchase in
history -- following a record high of 1,082 tonnes in 2022 cutting a cheque
worth some $70 billion, when global central banks bought gold at the fastest
pace since 1967.
The National Bank of Poland and our own Reserve Bank of India are the leading
buyers in 2024 so far, followed pretty closely by the Central Bank of
Uzbekistan and the Bank of Turkey. In fact, Turkiye was the largest buyer in
2022, adding 148 tonnes, while China added 62 tonnes.
A significant two-thirds of production, or 741 tonnes of official gold purchased in 2022 went unreported. Analysts believe China and Russia could have accounted for some of these purchases as both countries are looking to de-dollarize global trade to circumvent Western sanctions.
Central banks have long held gold to manage currency risk, promote stability
during economic turmoils, as a hedge against the eroding purchasing power of
currencies, mainly the US dollar, with which the yellow metal has an inverse
relationship. Whenever the dollar falls in value, gold prices rise, protecting
central banks from volatility.
However, the recent gold purchases by central banks are in stark contrast to
the 1990s and early 2000s, when they were net sellers, thanks to better
macroeconomic conditions. As growth was going strong, gold's safe-haven
properties were less valuable, and low returns made it unattractive as an
investment.
Source: https://www.newindianexpress.com/