Why Gold Prices Are On The Rise Despite COVID-19 Crisis

Gold has caught the eye of investors since of the stocks and real estate prices have plummeted because of COVID-19.

Gold prices are touching new highs as investors rush to buy the yellow metal due to uncertainty of other asset classes during the ongoing COVID-19 pandemic. While the equity markets have recovered from their March 2019 lows, the other major investment avenue, real estate has crashed due to rising inventories and the industry not being able to deliver the properties on time.

Speaking to BOOM, Prithviraj Kothari, President, Indian Bullion and Jewellers Association said, "Demand of buying gold is very real because of the uncertainty of COVID-19. There's no vaccine in sight and there are impeding gaps in investment being filled by gold."

"People who haven't invested in gold since 2011 are adding gold in their portfolio. People are looking at gold as a stable, lucrative source of investment as compared to other desolate options right now." Kothari added.

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Reuters reported that as of July 28, gold is inching close to its highest value of $2,000 per ounce (at $1,967), breaking its earlier 2011 record of $1,920.30 an ounce.

Kothari added that the gold prices are rising as Exchange Traded Funds who were selling gold previously have turned buyers in the last in the last 4 months. World Gold Council's data shows that ETFs backed by gold have seen the highest ever holdings in June 2020 at 3,621 tonnes.

RBI's April 2020 Monetary Policy Report also states that bullion values rise in tandem with economic uncertainty. COVID-19 has slowed down world economy and tensions between China and the world have contributed to economic uncertainty.

This has led to a rise in gold prices according to Kothari. The shutdown of precious metal mines and refineries, delay in shipment orders and restrictions on air travel has led to the escalation of gold prices as investors rush towards safe havens to tide this unprecedented crisis.

Along with an all new high for gold prices, the unprecedented crisis also gave rise to the highest ever difference in prices of spot gold rates and future gold, seen at $70 in March 2020.

Spot gold rates are determined as gold purchased on the spot and cash are interchanged almost instantly. Futures gold refers to trade in which a transaction is executed on a particular date but the product delivery happens on a later date.

According to Reuters, the $70 difference in the London spot gold prices compared to the US gold futures prices occurred because of COVID-19 uncertainties like restrictions on refineries and the pause on air travel putting a question on how shipments will reach the US to meet contractual requirements. "I have never seen such a huge difference in my career of 41 years," said Kothari.

But Kothari is hopeful that these prices might drop off a bit when pandemic related restrictions start easing. "Once COVID-19 related travel restrictions are lifted, mines and refineries start functioning again, it might bring the edge off gold prices," he said.

Also Read: Understanding The Economic Impact Of COVID-19

The rise of silver prices may be a bit slower because its industry use doesn't surpass its availability. "It might hit a higher mark because of the pandemic, but it will eventually dip down," Kothari concluded.

Highlights
-People are considering gold as a stable source of investment.
-Prices of gold may drop off when COVID-19 travel restrictions ease and mines open up.
-Silver may not see such an exponential rise in prices.

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