Not equity! Why central banks and investors are getting attracted towards Gold

Gold prices on fire

Gold prices in India have been experiencing a significant upward trajectory, reaching Rs 60,000 per 10 grams as of March 21, 2023. This surge in gold prices has caught the attention of central banks and investors worldwide as they seek a safe haven amid uncertainties in the global economy.

In 2022, central banks purchased a staggering $70 billion worth of gold, marking the highest annual demand in 11 years, according to the World Gold Council.

Several global events have contributed to the rally in gold prices. Firstly, the increase in inflation has prompted central banks to raise interest rates, further driving up the demand for gold, which is a safe haven.

Geopolitical tensions, particularly those between Russia and Ukraine, have also raised fears of a potential global conflict, leading investors to seek the stability offered by gold. 

Additionally, recent events such as the collapse of the Silicon Valley Bank and the stressed sale of Credit Suisse to UBS have intensified interest in gold as uncertainties loom over stock markets worldwide.

How much gold has risen over the past year?

Gold prices in India experienced significant fluctuations in 2023, with a notable increase compared to the previous year. Over the first half of the year, the price of gold rose by approximately Rs.3,000, representing a gain of around 6.5%. As a result of heightened demand for gold, the equities market has witnessed a decline since the beginning of the year.

It is crucial to recognize that gold prices are subject to fluctuation throughout the year, and the figures mentioned above reflect average prices. 

Investment Opportunities in Gold

In response to the demand for stability in the volatile world of cryptocurrencies, new forms of stablecoins have emerged, backed by gold. According to Everett Millman, chief market analyst at Gainesville Coins, many people who are new to cryptocurrency worry that it lacks physical backing. Therefore, linking cryptocurrency to tangible assets like gold can provide reassurance and make sense as an investment option.

Digital gold coins, such as those offered by startups like JAR, a Bengaluru-based app founded in 2021, encourage daily savings by automatically investing users' spare change from online transactions into digital gold.Jar was inspired by the personal journeys of both founders, who hail from Tier II towns.

“We wanted to inculcate the habit of saving money, especially in young Indians, without necessarily making it seem like a daunting task. And this is where our first feature came into being: the rounding-off feature,” Nishchay says.  

Users can round off their purchases to the nearest 10 and invest the difference in gold. Additionally, users can choose a fixed amount for Jar to invest in gold on a daily basis. Digital gold coins are becoming more popular as they are a newer version of stablecoins and can help to curb volatility by being linked to real-world commodities.

Similarly, Sovereign Gold Bonds (SGBs) offer a superior alternative to physical gold, eliminating storage costs and risks. Investors are protected by receiving the prevailing market price at redemption. SGBs provide guaranteed market value at maturity, periodic interest, and a 2.5% interest on capital appreciation. They are highly liquid, traded on exchanges, and come with a sovereign guarantee. With no expenses involved, SGBs have gained popularity, raising around Rs 43,000 crore in 62 tranches issued by the Government of India through the RBI.

SGBs offer advantages over other forms of gold, such as jewellery, as they do not involve making charges or concerns about purity. The bonds are held either in the books of the Reserve Bank of India (RBI) or in dematerialized (Demat) form, minimizing the risk of loss or damage.

Demand for gold in India

The latest Gold Demand Trends report by the World Gold Council (WGC) revealed a significant decline in the demand for gold jewelry in India during the first quarter of 2023. The demand dropped by 17%, reaching a total of 78 tonnes, which is the lowest first-quarter demand since 2020. The primary reason for the decline in demand was the sharp increase in gold prices, which deterred consumers from making purchases. 

The Q1 figure of 78 tonnes represents a substantial 65% decline from the strong demand seen in the previous quarter. This pattern has been observed four times since 2010, with the exception of the pandemic gap.

Somasundaram PR, the Regional CEO of the World Gold Council in India, explained that rising gold prices and market volatility significantly influenced consumer behavior. He also pointed out that the limited number of auspicious days further impacted the decision of households to postpone their gold jewelry purchases, hoping for a price correction in the future.

Long-term outlook for gold

According to the latest long-term forecast, Gold price will hit $2,500 by the end of 2024 and then $3,000 by the end of 2026. Gold will rise to $3,500 within the year 2029, $4,000 in 2030, and $5,000 in 2032.

Somasundaram said, “Our forecast for the gold demand is muted for 2023 even as the economic momentum in India remains healthy, and the RBI rate hike cycle has paused. The outlook for gold purchases is highly dependent on rupee prices, which show no sign of abating, and which will act as a deterrent, and of course, monsoons, though Q4, as always, could throw a surprise. We believe current trends point to less than 800 tonnes of demand for 2023.”

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