Chronicles of gold rally

Yellow Metal (aka ‘gold’) is lucrative, lustrous, an electrical conductor, malleable and a safe haven. The list is not exhaustive. Given the current circumstance, the price of the yellow metal continues to remain bullish, subject to moderate corrections. Gold has seldom failed in maintaining its store of value. Lets ponder a bit on the rationale behind the current trend witnessed vis-a-vis yellow metal.

Negative correlation with interest rates: Gold seems to loose its lustre, wherein monetary regulators are trying to shut their floodgates. A reservoir’s floodgate out pours water; Reserve bank’s floodgates out pours currency. When interest rates are spruced up, investors tend to beeline debt markets and other prudent investment abodes (like FDs), since they would offer better rates than before, bearing minimal or null capital risks. (Capital risk is associated with erosion of investment value). Interest rates are generally tightened to subdue inflationary pressures in the economy. Once the pandemic looses its severity, inflationary pressures are bound to eclipse the world, in such a situation the yellow metal recedes in demand/value.

Inflationary hedge: Yellow metals serves as a reliable hedge against inflation. Gold prices tend to inflate, with inflation unrestricted in the economy. Since inflation per se, is an reflection of excess currency in circulation; this aides in excess currency getting invested in gold, pushing the demand cum prices. Furthermore, returns in other forms of investments tend to remain sober during inflationary periods. For instance, incumbent inflation is hovering in 6-7% ballpark & interest rates in the economy have cracked beneath bottom. Indeed, gold is the cynosure investment abode during the present days.

Market Confidence: With the gloom surrounding, going concern of select industries (Air travel & Entertainment) – the investor confidence in the market has shackled. RoE (Return on Equity) has forayed into negative territories, alongside upended share prices. Albeit, behemoths in the respective industries have garnered their lost market value, post relaxation announcements; growth remains uncertain. In such circumstances, neither domestic investors nor FPI (Foreign portfolio investors) would be ready bear “capital risks” associated with equity. Eventually, gold is one among their last resorts!

Greenback vs Gold: Visualise, rails travelling over parallel tracks on a hill, in opposite directions. Such is the relationship between gold & greenback. Gold prices are fixed in dollar terms, generally. When dollar tends to appreciate vis-a-vis other currencies, gold turns out to be more expensive for the world, but U.S.A. On the contrary, when dollar is on a depreciative course, yellow metal turns out to be less expensive for other countries. Ergo, Greenback and gold are inversely related. Incumbent, de-dollarization is gaining momentum across the globe, with countries insisting on acceptance of payments / receipts in their indigenous currencies for cross-border transactions, which is also aiding the gold rally.

At times of crisis, gold gains additional momentum as an investment of the last resort, as in the current circumstance!

Published by adithyaarunachalam

I'm a millennial, from Chennai, India. Passionate about building up a career in finance, I follow and stay abreast on news feeds. I'm a novice blogger, So feel free to pass on your conjecture to me

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