The price of gold has risen over 30% this year, aided largely by the global pandemic, COVID-19, which raises the question: why does everyone turn to gold in such uncertain times?
The global economy has suffered massively due to the corona virus, with aggregate demand in countries at a very low level and not much business taking place. In such times, it is the government’s and apex bank’s responsibility to try and spur aggregate demand in the economy, and in most cases, they have done this by slashing borrowing rates to incentivize borrowing and pumping in money into the economy to spur demand. The natural result of such actions would be inflation, as money supply in the economy increases, causing the value of the currency to decrease. Even the US dollar, which is considered one of the most stable currencies in the world, is losing its value as the US Federal Reserve has kept borrowing rates at 0% and bought bonds worth billions of dollars. Coupled with a $2.2 trillion emergency relief bill, even the dollar’s value is on the decline.
These multitude of reasons have compelled investors to turn to the one of the most traditional forms of investment: gold. Gold is a scarce metal, whose supply is limited, unlike currency. This means that even in times of crisis, like the times we are living in right now, gold remains a safe option to invest money in, as it has been since times immemorial. This thought process has led many investors to put their money in good old gold, consequentially driving up the prices to over $2000 per ounce as of the time this blog is being published.
This, of course, doesn’t mean that gold prices will always remain high or get pushed up even more. Based on the next steps of the various governments of the world regarding interest rates and money supply, gold could either see more investors flock to it, looking for a safe haven to deposit their funds, or see people move back to liquid currency. As of now however, it seems to be that all that glitters, is indeed, gold.
krn
A good narrative on the traditional “safety net” pedestal of gold. Indians have gone far ahead, making gold transcendental, equating it with the color of God and even with divine resilience. Nevertheless, it is equally interesting to watch gold descending to mundane levels, freely jumping up and down, according to the ups and downs of US-China relation on a daily basis!
G S Menon
Yes, gold coninues to glitter and remains an attractive, ready investment option for many Indians.
It was more so, before the development of the Stock Markets. Buying gold was an integral part of all celebrations. Though not very liquid, conversion into cash in an emergency was easy, with the lenders considering it as good security. An enterprising person could even use the money for productive purposes and earn some profit as well.
Sreekumar
When economy is going downhill the investment opportunities dwindles. Investors will look for safer avenues since stock market getting riskier in a slowing economy. In such a situation gold become a safer option.
Countries value currency by linking to gold. This is gold standard. Time to think whether how sustainable is gold standard. Timely penned perspective Anirudh.