Dr Rajkumar Singh
In this devastating phase of pandemic Covid-19 everything including human face has been visibly faded, except the price of gold which has crossed the record hike after 2011. Here, we are compelled to ponder over the causes and its subsequent effects on our society. We know it traditionally that the gold has found its place in the rare metals of the globe and normally used as coin, art and jewellery, the latter specially for women in general. It has a naturally occurring metallic chemical element having high economic value. Chemically precious metals like gold happens to be less reactive, usually ductile with a high lustre. Among the metals the gold and silver are considered of economic value, but of the two gold is also popular as an investment. Investors generally purchase it as a way of diversifying risks. In comparison to investment in other precious metals, gold is considered more safe not only in India but also in a number of countries.
Brief history of changing gold status: Throughout the human history gold has been considered as money and many European countries used this metal as their standard till the financial crisis at the time of Second World War. Even after the War the United States of America remained under the Bretton Woods System which was established to manage commercial and financial relations between US and the several European countries. In line, the US delinked its currency in 1971 and the last major currency to divorce gold was Swiss Franc in the year 2000.Although like other commodities the gold price is driven by demand, supply and speculative demand, however, in case of gold saving and disposal play larger role in its pricing. In addition, its price also depends on annual production as well as on the gold reserves or gold stored- officially and unofficially. According to the World Gold Council the annual production of gold is around 2,500 tonnes of which about 2,000 tonnes goes to jewellery, industrial and dental production and 500 tonnes to retail investors and exchange – traded gold funds.
Circumstances leading to price hike: As coronavirus stalls imports and crushes income across the board, we’ve seen a sharp decline in the physical demand for gold. China and India, the world’s biggest buyers of gold bars, coins and jewellery, are staying put on the sideline. The demand drop is so bad, that precious metals consultancy, Metals Focus Ltd. believes Chinese and Indian gold jewellery consumption is likely to decline by about 23% and 36% respectively. But because the pandemic is also driving the biggest, baddest rally the gold market has ever seen. Globally, gold prices have risen over 18% in 2020?—?the highest since 2011. Investors search for yield. They want to park their money. Redeem it in a few years and want to see it appreciate quite a bit by then. Now obviously, if you have a higher risk appetite you’ll chase higher yields. But when you’re trying to cushion your portfolio during a pandemic you’re looking for something more nuanced and in that case our priorities change.
Now, people started targeting safe havens. Something that can retain its value. Something that will help us weather the storm. Something like a US Treasury— promissory notes issued by the government of the United States of America in exchange for money. Treasuries, as we already noted, come with a promise. You lend $99 today and the government pays you back in full with an extra $1 on top. The effective yield, in this case, is 1/99=1.01%. That’s what you’re expected to make if you hold a 1-year Treasury Bill (T-Bill) until maturity. And it’s almost certain that we’ll make this money considering the United States government has never defaulted on its obligations to pay. It has never, ever missed a payment. So when investors seek certainty, they usually turn to the T-Bill. However, yields on 1-year T-Bills have been falling so precipitously that it’s now fast approaching 0. And this is the handiwork of the US Central Bank, the Federal Reserve.
A strategy of hope in the pandemic: On March 15th, the US Federal Reserve lowered its federal funds’ target to a range extending from 0% to 0.25% in a bid to cushioning the financial system from the pandemic. It’s a barometer that gives you some idea of what banks expect to make whilst lending money to each other. And while this rate doesn’t directly influence consumer lending rates, changes here will ultimately trickle down into everything?—?home loans, auto loans and even US treasuries. Because if the banks only expect to make 0.25% at best, a regular investor can’t expect to make much more whilst lending to the government. They will have to fall in line. So whilst the Federal Reserve tries to make borrowing more accessible, it’s also influencing the yield on T-Bills, pulling it down to near 0%.And since there is very little money to be made on arguably the most secure asset on the planet right now, investors are looking elsewhere. Remember?—?this next asset has to be an excellent store of value. It has to protect your downside. It must also serve as an effective hedge against inflation?—?meaning it has to appreciate in value and keep pace with the basket price of goods and services that most people consume on a daily basis. But more importantly, it must offer us psychological comfort at a time when geopolitical tensions are high. At a time when a virus looms large. At a time when uncertainty lurks around every corner. It has to shine and it has to shine bright.
— The writer is Professor and Head, P G Department of Political Science, Bihar, India.
