Gold is back in the spotlight as a hedge against heightened geopolitical uncertainties, with its price hitting all-time highs. Through the ages, gold has traditionally been a safe haven in times of trouble. But with the world economy being currently buffeted by adverse headwinds due to prospects of a trade war — thanks to US President Donald Trump’s weaponisation of tariffs — stock markets are on the edge. In this milieu, the allure of this precious metal is growing also as an avenue for profitable investments as its returns outpace equities and other asset classes. Gold’s milestones include crossing $1,000 per troy ounce in March 2008 during the global financial crisis and hitting $2,000 in August 2020 during the Covid-19 pandemic. There has been a near tenfold rise in its price since 2000 that has clearly outperformed global stock indices. Besides the safe haven aspect, Indians are also investing in gold exchange traded funds — which recorded positive flows for 10 consecutive months till February — as domestic equities have been floundering.
The surging prices of gold are also due to demand from central banks, especially of emerging economies, that have purchased more than 1,000 tonnes annually for the past three years. As is the case with individuals, central banks purchase gold as a hedge against uncertain times. The allure of this precious metal has been compelling for the Reserve Bank of India (RBI) due to the challenges of forex reserve management when yields on securities are low and interest rates are on a declining trend in the advanced countries. The other motivation is to diversify its reserves away from dollar-denominated investments. The RBI added 72.6 tonnes to its stocks last year and a further three tonnes in January while holding off purchases in February. This marks its second pause in three months with gold stocks remaining steady at 879 tonnes. With soaring prices, the share of gold in total forex reserves rose to 11.7% as on March 21, the highest on record and 8% higher than a year ago, highlighting the RBI’s continued diversification of its forex reserves, according to the World Gold Council.
India is no ordinary country as far as gold is concerned, as it is the world’s second largest consumer of this commodity after China. The elevated prices may have taken the shine off jewellery purchases but there is rising investment demand. Indian households’ gold reserves stand at 25,000 tonnes, which is much larger than the holdings of the world’s leading central banks! As gold hits record highs, Indians are also taking out loans with this precious metal as collateral. The proximate factors behind our affinity for gold are imperfectly understood although research — done by the late eminent economist, A Vaidyanathan, for instance — outlined several explanatory factors.
This includes real GDP as a proxy for rising agricultural and non-agricultural incomes and household savings in financial assets. For any given level of GDP, higher the household savings in financial assets, higher will be the demand for gold. Demand also depends on the relative price of gold and other financial assets, which can be proxied by the index of share prices like the BSE index. This is indeed a crucial variable as depressed stock market sentiment enhances gold’s growing appeal as an avenue for investments.