Gold has always been considered a safe haven investment asset in the past time because of difficult economic situations where other assets face uncertainty. Meanwhile, gold is used as safer assets which provide protection in the downturn of economic conditions and maintain its value. But if we compare it with the return of equities over the years then there is a different outlook. The performance of gold has gained attention as a safe haven and wealth generator with a return of 17% in the last three years beating the return of Sensex which is around 11.6%. In ongoing global instability and weak dollar demand, gold may be seen as a better investment option, especially for conservative investors. At the current time price of gold price approaches ₨90,000 for 10 grams, should investors allocate their funds more to gold, and why the price of gold is going up?
The gold price increased on high from various factors which included trade disputes between countries led by the American tariffs policy. It directly affects global trade and ignites the spark for gold demand by investors. The weakness in demand for the dollar and inflation worries surge the price of gold and gold ETFs have experienced significant growth, recording a $9.4 billion(100 tons) inflow in February month which is the highest since March 2022. Along with it central bank’s monetary approach introduced excess market liquidity which wreaked fiat currencies & raised inflation concerns which supported an increase in gold value.
In present market conditions, the gold price is at all time high because geopolitical uncertainties rise by increasing trade tension which lifted demand for safe-haven assets. In the domestic market, MCX gold price surged to a record high ₨88,852 level. In the international market bullion prices extended to $3,000 price. The price of spot gold price hit a record $3,018.66 whereas US gold futures were around $3,027. Due to global instability rate of gold has rallied more than 14% year-to-date (YTD). After US President Donald Trump took charge at the White House in January the price of gold hit a record 14 times due to his tariffs policy. In the context of geopolitical instability, escalation in the Middle East also weighted tension as Israel launched airstrikes across Gaza that killed hundreds of people, breaking a nearly two-month ceasefire. The recent change in the price of gold is also associated with a dollar value, since Donald Trump started his tenure the value of the dollar in the market has seen more volatility. As there is an inverse relation between the dollar and gold, in the present time after Donald Trump's uncertain policies with their trading countries rally uncertainties at the global level. This creates a trust problem for countries that reserve their forex in USD that’s why there is a rise in demand for gold in the market. In the domestic market, gold was one of the top-performing assets which gives a 21% return year-on-year basis. Indian ETFs record significant annual inflows of gold, adding 15 tons of gold reached to 57.8 tons with net inflows of ₨112 billion.
Why Gold Consider as a Safe Haven Assets?
Gold is a reliable asset when the economy is volatile and it provides a hedge against the rising cost of living because gold is able to store its value in real terms, unlike the cash. Most of the central banks have their own gold reserve to protect their economy from any global financial crisis. Gold is a safe haven asset, factors which drive economic uncertainties such as COVID-19 in the past and the price of gold rises according to the volatility of periods due to increasing investor demands to minimize portfolio risks by investing in gold against equity.
Gold and Fiat Currency Relation
In the past majority of countries used the gold standard which meant the value of their currency was pegged to the price of gold. In this, if 1 gram of gold stands for ₨1000 then one rupee is equal to 1/1000. Nowadays most countries have shifted to fiat currency, in this currency value is defined as the monetary supply or ability of the government to repay their debts. It means when trust in government or the economy falls, the value of their currency also falls. In this situation, investors move to gold to protect their wealth and currency devaluation risk. It means gold has an inverse relation with the dollar that’s why the gold price is rising because the dollar is degrading due to the slowdown of the American economy. The current stance of Trump's policy for making America a leader in manufacturing, this drastic change made a serious hit back to the global economy which raised demand for gold.
Impact of fed FOMC Meeting
The two-day meeting of the US Fed’s Federal Open Market Committee (FOMC) is scheduled for 18-19 March. There is the probability that the US Fed is likely to avoid cutting rates due to global uncertainty and despite weaker US economic numbers. In recent data reports, Both the Producer Price Index (PPI) and Consumer Price Index (CCI) showed a decline in February which gives hope to investors that the Fed will cut their rates. But Powell had said before, that he would not be in a hurry to cut down the rates. Therefore in this meeting less hope for a rate cut which negatively affects the demand for the dollar in the market. This will push the price of gold in the commodity market. In this situation where the interest rate is stagnant, it will increase demand for gold because borrowing costs will remain lower which is less attractive for investors to invest in the US dollar.
