Gold in the time of pandemic

As India was speeding towards the economic boom and Indians were pinning their hopes for a better future, cataclysmic Covid-19 penetrated the civilization and turned everything upside down in the spur of the moment. The effective economic policies injected into the economy over the years fell flat due to this unexpected phenomenon that engulfed the world like a wildfire. While stocks baffled the Indian investors, it was gold that regained their trust.

This was not the first time that India, which is the second-largest consumer of gold in the world, had witnessed the demand for gold reviving sharply during a crisis.  Furthermore, the World Gold Council (WGC) stated that India saw a demand for gold rising 19% year-on-year to 76.1 tonnes in the June quarter in 2021.

The trajectory of gold during the pandemic

The rise in gold value was a result of the financial lockdown imposed on the Indian economy.  Job losses, salary cuts, medical expenses resulted in a decrease in individual loans and loans being taken by MSMEs (micro, small and medium enterprises). This financial uncertainty turned many to invest in gold which is considered a safe haven. Also, Central banks too trimmed their forex reserve holdings in US dollars to substitute them with gold.   As per the International Monetary Fund (IMF), in Q3 2021, India’s forex reserve was USD 637.5 billion. . These were some of the factors which raised the demand for a safe investment option. In addition to this, it is expected more packages would be announced in the near future to infuse liquidity into the system. This will further boost the gold value as gold and liquidity are positively correlated.

The World Gold Council, in its year-on-year report, Gold Demand Trends 2021, stated that demand for jewellery in India during 2021 was up by 93% at 610.9 tonnes, compared to 315.9 tonnes in 2020.  Also, at the world level, this demand increased by 52%. This rise in demand in India was due to the wedding and festival season as lockdown restrictions in the second half were eased and a successful vaccination programme along with some economic growth changed consumer sentiments and induced them to spend and invest during festivals like Dussehra and Dhanteras.

Gold is an effective hedge against inflation and is more liquid in comparison with real estate or other debt instruments which come with a lock-in period. Moreover, international factors also determine the position of the precious metal. During the global economic crisis in September 2008 due to the collapse of Lehman Brothers in the US, gold prices jumped from around $700 an ounce in October 2008 to a peak at around $1900 an ounce in September 2011. As gold moved in tandem with heightened economic policy uncertainty, it performed well during the pandemic.

Moneycontrol journalists were not involved in the creation of the article.