Commodities

Explained: Why India gold prices are at an all-time high amid COVID-19 lockdown

Updated : May 18, 2020 04:00 PM IST

Gold is considered as a hedge against inflation and a safe investment during political or economic turmoil.

Apart from being a safe heaven, the US-China trade relation is playing its part.

Gold prices in India rose over one percent on Monday to hit an all-time high of Rs 47,929 per 10 grams on the MCX amid a sell-off in risky assets and weak Indian currency. The domestic bullion prices surged tracking gains in the international yellow metal prices that were trading at levels highest in more than seven years. Silver futures in India also rallied 4 percent or more than Rs 1,900 to over 48,600 per kg.

Though the physical demand for gold is near zero amid the coronavirus-related nationwide lockdown, the price of yellow has seen a sharp surge in recent months. Last week, gold and silver prices skyrocketed with the yellow metal rising around 2.50 percent while silver rallying more than 8 percent in the international markets. Gold prices have rallied over 16 percent so far this year.

As uncertainties continue to loom over global economic growth amid a series of events since the start of this year, the safe-haven appeal for gold has skyrocketed and analysts expect the prices can surge near Rs 52,000 per 10 grams in next 12 months.

At 3:20 pm, gold prices traded 0.98 percent higher at Rs 47,845 per 10 grams while the Silver prices rallied 3.84 percent to Rs 48,511 per 1 kg on the MCX.

Here are the reasons for a strong rally in the gold prices:

Safe-haven appeal

The disruption in the economic activities, geopolitical uncertainties, and the global slump in economic growth has led investors away from risky assets, thus increasing the safe-haven appeal for gold. Gold is considered a hedge against inflation and a safe investment during political or economic turmoil. SPDR Gold Trust holdings, the world's largest gold-backed exchange-traded fund, rose 0.8 percent to 1,113.78 tonnes on Friday. Dovish comment by Federal Reserve Chairman Jerome Powell when he said that business shutdowns could easily cause the US economy to crash by up to 30 percent in the current quarter, also dampened hopes of economic recovery in near term leading to gains in gold prices.

US-China trade tensions

Trade tensions between the US and China renewed after China firmly opposed the latest rules by the United States against Huawei saying that it and would take all necessary measures to safeguard Chinese firms' rights and interests. Souring relations between the two countries were also witnessed after the US President Donald Trump said that he was not “thrilled” with the ‘Phase 1’ of the trade agreement.

Massive stimulus measures from central banks

In order to support growth, interest rate cut by most of the central banks in the world along with monetary stimulus measures has pumped heavy liquidity in the markets and economy. Easy money in the markets is always positive for the yellow metal, analysts said.

Weak US data

Data on Friday showed US retail sales and industrial production both plunged in April, putting the economy on track for its deepest contraction since the Great Depression. Fed Chair Powell said a US economic recovery may stretch deep into next year and a full comeback may depend on a coronavirus vaccine.

Mining production

The coronavirus-led lockdowns across the world have impacted gold mining activities in the first quarter of CY2020. According to the World Gold Council, mining production fell 3 percent YoY in the first quarter, lowest since 2015. Thus, the supply of gold was severely impacted resulting in a rise in prices.

Exchange rate

India is a major importer of gold. Any change in the exchange rate affects gold prices. In the domestic market, the rupee has fallen sharply. On Monday, the rupee plummeted nearly 33 paise to close at 75.91 (provisional) against the US dollar on Monday, tracking weak domestic equities and foreign fund outflows.