Gold is held
by central banks as a part of their reserves.
If trade wars worsen and if the central bankers want to further diversify away from the US dollar, the demand for gold may go up, thus pushing up prices.
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1. Demand for Jewellery
China and
India account for more than half of the global demand for gold, mostly for
making jewellery. Rising gold prices and the lockdown ensured that gold demand
fell 65 per cent (China) and 41 per cent (India) in the first quarter. Global
demand declined 39 per cent. When gold prices rise quickly, jewellery buyers
may take time to adjust with the new normal.
2.
Demand
for Gold as Investment
Investors
consider gold as a safe haven. Exchange traded funds backed by gold added 170
tonnes in April 2020 – a five per cent growth in value terms, according to
World Gold Council.
Gold ETF (Exchange
Trade Funds) assets have grown over 80 per cent over the past one year.
Bars and
Coins also may be in demand as investment avenues. Due to operations of gold
refiners being hit in Switzerland, there has been limited supply of refined
bars and coins.
3.
Exchange
rate
Since gold is
priced in US dollars and we import all our requirement, exchange rates play a
key role in pricing. A weak rupee can add to the price of gold.
Despite being
a safe haven and having rallied spectacularly in the last year-and-a-half,
investors must not rush to increase their gold exposure.
Investors
would be better off focusing on their asset allocation than chasing returns.
Don’t allocate
more than 10-15 per cent of your portfolio to gold. SGBs and gold ETFs are good
vehicles to take exposure.
4.
Producer
hedging
Miners tend
to sell their gold production in the futures markets to hedge themselves in
case of a fall in price. This is termed as producer hedging. If producer
hedging rises, prices naturally drop. Gold miners may chose not to hedge all
their output and even reverse their hedged positions (de-hedge in industry
parlance) by buying back the futures contracts sold in the past, if they expect
prices to head higher.
5.
Scrap
Sales
Gold is sold
or pledged to raise cash. Job losses across the world and recycled gold
or scrap sale are
expected to go up.
Due to the
lockdown, large markets such as India have not seen scrap gold sales so far, as
jewellery retailers remain shut and banks are not allowed to buy bullion back.
But the situation may change after the lockdown ends. Increased scrap sales may
push prices lower.
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