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Gold going strong on safe haven demand

Loose monetary policies by central banks is set to make alternative asset classes more attractive.

, ET Bureau|
Last Updated: Dec 21, 2019, 03.38 PM IST
Gold, which broke out of a narrow, six-month range of $35 an ounce since June, could rally even more next year, thanks to loose monetary policy by central banks across the world, which may in turn make alternative asset classes like the yellow metal more attractive to investors.

The median price for 2020 has been pegged at $1,494 an ounce (approximately 32 grams), about 7% higher than the median forecast of $1,402 for the current year, according to Bloomberg.

For the quarter ending December, the forecast was at $1,474, just $4 below its spot rate of $1,478 on December 17.

The increase, when translated into domestic prices, works out to roughly 8.6% at Rs38,122 per 10 gm, ex-GST of 3%.

London-based precious metals consultancy Metals Focus said in its Precious Metals Investment Focus 2019/2020 that “...more accommodative monetary policies are also expected from other major central banks. As a result, the record level of negative-yielding bonds is likely to rise further, which should support higher investment inflows into alternative safe-haven assets, such as gold.”

The slowdown in the global economy is also proving to be more pronounced than previously expected, partly due to the escalation of the US-China trade war, according to the report.

Although this has resulted in growing risk aversion, equities remain near all-time highs and, seemingly, most investors are still not betting on a sustained correction. “We believe investor sentiment will eventually change and this is also likely to encourage some rotation in favour of gold,” it said.

In India, gold is considered as a store of value that can be used in times of economic distress and when prices spike as they did in the September quarter. For instance, while net bullion import was down 66% year-on-year at 80.5 tonnes in the September quarter, thanks to the sequential jump in average price by around 14%, scrap supply (sale of gold jewellery for cash by people) jumped 59% year-on-year to 36.5 tonnes.

Net gold imports into the country in the calendar year through September totalled 502.9 tonnes against 587 tonnes in the same period last year, as the average quarterly price rose 22% (ex-import duty) from the year-ago period. India, on average, consumes 750-800 tonnes of gold annually.

In the first nine months of 2019, India consumed 496.1 tonnes of gold, against 677.4 tonnes by China, Hong Kong and Taiwan — the world’s largest consumers of the yellow metal.

“Gold is set to see a ramp-up in investments as it’s a hedge, both against a weaker rupee and rising inflation,” said Rajesh Palviya, derivatives head of equities and commodities at Axis Securities.

Prices will increase 7-10% in the domestic market in 2020 and central banks will diversify their foreign exchange reserves by buying the metal, Palviya said. Central banks and other government institutions accounted for 547 tonnes of overall demand in the calendar year through September, up from 490.7 tonnes in the year-ago period.
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