Is gold a safe-haven investment during the pandemic?
Gold has traditionally been a safe-haven investment and even more so in India. The fact that India has continued to be one of the largest importers of the yellow metal for many years, underlines its importance in every Indian’s life.
Given that the whole world is reeling from the devastating effects of COVID 19 pandemic, including India, an important question like whether gold is a safe option for investment should be examined thoroughly. Especially since the stock markets are volatile and the real estate market continues to depreciate in large parts of the country.
For this let us first understand the importance of gold in the economy and particularly as to how it affects the –Balance of Payments and the Exchange Rate.
Traditionally Oil and Gold have been the two biggest items that India imports by value. In 2019-20 FY, Indian gold imports were at US$ 28.2 billion.
Thus, it not only impacts the balance of Trade or Balance of Payments (BOP), but also the relative value of INR against US$. When import becomes higher, demand for US$ pushes up the exchange rate higher, leading to depreciation of INR. This also impacts inflation readings.
After understanding the importance of gold to the exchange rate, one thing remains to be explained. Everyone is flummoxed at the rise and rise of gold prices, touching new highs in 2020. Why is this happening and where would this lead to? Famous investors including Warren Buffet have been expounding the virtue of gold as an asset class to be held against a background of low growth and competitive expansion of balance sheets of large Central Banks to fund deficits.
In India particularly, gold prices have seen a double whammy. While the yellow metal’s prices started rising in late 2018 against US$, INR also depreciated heavily over that period against US$. Gold prices in India touched a recent high of INR 55,000.00 + in August 2020 per 10 grams of 24 Carat gold. This now begs the question whether the rally in gold prices especially against INR will hold or is it going to retrace back from recent highs? It’s particularly difficult to answer this question as the trend has been only unidirectional.
However, if we go by what we had witnessed in the past, it will not be incorrect if we say that, prices may tend to correct in the coming days/weeks. However, as long as the world is under COVID 19 threat and due to circumstantial factors, US$ remains under pressure, we could witness another rally in international prices of gold.
Hence, while in the short term one should favour “long” gold, one will have to change the strategy as soon as we see a reversal. We should also remember that gold prices had almost touched the 2000 US$ mark nearly a decade back in 2011 and had then fallen to almost US$ 1100 by 2018.
So, should we believe in the maxim, “All that glitters is not gold”. Or should we continue to believe in the old maxim “All that glitters is Gold”. The choice is ultimately yours.
The author is the Executive Vice President, Treasury, HDFC Bank