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Gold rate today falls as investors book profit after stellar rally

Wed Feb 26 2020


Precious metal gold has been making news more often in recent times, as economies globally have been navigating one after another crises.


On Wednesday, the yellow metal futures fell 0.64 per cent or Rs 273 to Rs 42,515 per 10 grams while silver futures plunged 1.01 per cent or Rs 482 to Rs 47,085 per kg.


Globally, gold rate rose heading back towards a more-than seven-year high hit earlier this week, as a warning from the United States over the domestic spread of the coronavirus outbreak rattled global markets, supporting safe-haven demand.


Calendar 2019 proved pretty good for gold, as the yellow metal surged amid fears of a possible slowdown in global growth and thanks to uncertainty surrounding geopolitical crisis in West Asia and Britain’s divorce from the European Union.


And if morning shows the day, even Calendar 2020 promises to be the second straight favourable year for gold, as spot gold prices have been moving north since the beginning of the year.


Gold delivered 19 per cent returns in 2019 after falling 1.5 per cent in 2018. It had gained 13.11 per cent in 2017 and 8.5 per cent in 2016.


Why do investors buy gold?

In times of a crisis, investors globally view gold as a safe haven just the way they treat US government bonds and currencies such as the US dollar, Japanese yen and the swiss franc.


Analysts say the precious metal acts as an effective portfolio diversifier and serves as a store of value, besides being a shield against inflation and a lender of last resort during economic uncertainties.


Why are gold prices rising?

Analysts said the rapid spread of coronavirus cases outside of China and its potential negative impact on the global economy are prompting investors to take refuge in safe havens like gold. Gold prices, they noted, have remained firm despite aggressive policy-easing measures carried out by China to shore up its economy and moderate physical market activities.


Does rupee value influence local gold prices?

A weak rupee often pushes up gold prices, as India meets bulk of its gold demand from through imports. A rise in gold prices, however, hits local demand for physical gold. Besides, any slowdown in global growth, muted inflation and fears of a recession cause central banks to pivot towards an accommodative stance, which buoys gold prices.


Why do central banks buy gold?

Central banks hold gold as a reserve asset, which is classified as monetary gold. Data showed central banks owned almost 34,000 tonnes of gold on last count, making them the third-largest reserve asset in the world. The increase in central bank demand for gold reflects current geopolitical, political and economic conditions, as well as structural changes in the global economy.


Gold is both a liquid, counter-cyclical asset and a long-term store of value. As such, it can help central banks meet their core objectives of safety, liquidity and return.


“Central banks continued to buy gold in last two years and they, including the Reserve Bank of India, have been buying upwards of 650 tonnes. Besides India and China, the rest of the world has also turned to gold. It is a great diversifier and return generator,” PR Somasundaram, India Managing Director of World Gold Council, told ETNOW.


How much money is invested in gold ETFs?

Edelweiss Securities says easy money flows are driving global equities along with other asset classes, particularly gold. Gold prices globally, it noted had been consolidating for seven years before finally breaking out eight months back.


“Interestingly, holdings in Gold ETFs are forming fresh records (having climbed for 20 days in a row). By value in ETFs, investors cumulatively held about $135 billion of gold (2,609 metric tonnes) as on 19 February. Since 2019, investors have bought 399 metric tonnes of gold (raising their exposure by 18 per cent), and the yellow metal shot up by 26 per cent during the period. This gold ETF binge also suggests investors are diversifying to cushion their portfolios against any sell-off in equities,” it said.


Will gold rate rise further?

According to the World Gold Council, many of the global dynamics seeded over the past few years will remain generally supportive for gold in 2020. In particular, financial and geopolitical uncertainty combined with low interest rates will likely bolster gold investment demand.


If you take India itself, in the last 15 years gold has returned about 9 per cent return. “It looks like there is certainly a lot of momentum that is there in this price rally. But we also have to be cautious of what is happening now, has also much to do with anxiety. As and when clarity emerges over virus spread, you will not have the same momentum there. Interest rates, strategic factors and also certain short-term anxieties play a part,” Somasundaram of World Gold Council said.


Should gold be a part of your portfolio?

Jimmy Patel, MD & CEO of Quantum Mutual Fund, in an article to ET said that one must allocate a small portion - around 10-15 per cent - of entire investment portfolio to gold with a long-term investment horizon.


“This would serve as a sensible and smart strategy. Gold Exchange Traded Funds (ETFs) and/or gold savings funds are smart ways of investing in gold,” he said earlier this month.