OH MY GOLD! What’s Happening with Gold?
Gold Prices in the Nepali Market has been growing and has reached the all-time high at Rs. 92,200 per tola on 15th July 2020. This all-time record has been broken multiple times this month and the value of gold looks like there is no stopping it. Comparing the current value on a year on year basis, Gold has seen a rise of 44% in value compared to last July. So, if you had purchased gold in 2011, you would have doubled your investment by now; which is around 8% of annual growth in the value and is a moderate return considering other investment avenues and opportunities.
The demand for gold in Nepal had decreased from March when the Nationwide lockdown was initiated by the government. The price was declining before the Lockdown in March, with the prices on 25th March at Rs. 77000, from a high of Rs. 82500 on 10th March 2020(all time high from that time). The market opened at Rs. 86,700, an almost Rs. 10000 increase compared to the March prices. Even though the demand was closer to nil during the 2 months, gold prices soared even when there were no buyers around in the retail and domestic market in our country.
Gold as a Commodity
Gold is a well sought after commodity Worldwide. The main reason for people being so obsessed with gold is because of its characteristics. Gold is durable, malleable, it doesn’t fade, it can be molded into coins, ornaments, it is a symbol of status in the society and most importantly, its value doesn’t erode in the long run. Many people use gold as a save investment as it is considered as the best hedge for Inflation. Inflation erodes the value of your currency, but in the long run, gold has always moved above of Inflation, not letting your value erode. So many use gold as a risk averting instrument. Unlike other commodities, gold cannot be consumed and it is nonperishable. This means that with the increase in supply, the quantity of gold in the world goes on Increasing. But this characteristic doesn’t stop the prices of gold to decline. This has been made sure by the concern and fascination of gold that the humankind has.
Pricing of Gold
Gold Prices are set on the basis of the Spot price (current price) of gold, the future market price of gold, the expected demand, and supply for the gold and the expected trading range for gold. The price-fixing of Gold is executed by the London Bullion Market Association (LBMA). From March 2015, IBA( ICE Benchmark Administration) started an online system called the LBMA Gold Prices which serves as a benchmark for Gold Prices Worldwide. The price is updated two times daily, once at 10:30 am in the morning and once at 3 pm (Both based on UK time). The pricing is fixed based on the buy and sell order received in the auction for a pre-determined period of time.
In Nepal, The Federation of Nepali Gold and Silver Dealers' Association fixes the price of gold which is valid all over Nepal. Unlike the LBMA Gold Price, gold prices in the domestic market are set for a 24 hrs period which is generally updated at 10:00 am every morning (Nepal Standard Time). The price for gold is set on the basis of the International Market price as the base price in which the customs duty, freight (Transportation cost), and insurance is incorporated, along with other commissions and margins. Since the price is set on the basis of the International Rate, the gold prices run along with the International Benchmark and the movement also correlates.
Source: Investing.com
Why is the price of Gold going up?
When you take the general takeaway, the demand for gold has dried up. The demand for the largest retail markets for gold; India and China aren’t fetching in more demands. According to the normal demand and supply theory applied to the commodities, this was the time in which the gold prices should actually come down. But no, the price of gold, which was around 1600$ in the international market during the time when Covid-19 has first declared a pandemic and it has crossed the 1800$ mark, which can be considered as a long term resistance line for gold, which was crossed some 9 years ago during the recovery from the global financial crisis.
But Gold has seen better growth than other investment avenues and it can be attributed to the unique characteristics that the gold as a commodity possesses. During abnormal circumstances, people turn towards gold to secure their investments. Since gold has been fetching in good returns in the long term and during this uncertain time, investors seem to have started trusting gold more than other devices of investment. With what’s going on around the world and chances of Worldwide trade slow down and the economy as a whole expected to slow down, investors may have started investing in gold to protect their assets from value erosion. Gold also has a tendency to recover faster than the stock market in conditions of different shocks in the market.
Another reason for the increase in the price of gold can be attributed to the weakening of Dollar. Historically, we can see that the Dollar rate and Gold prices move in the opposite direction; When the Dollar rate goes up, the gold prices come down and vice versa.
This characteristic has been seen many times and it was also seen during the 2007-8 Financial crisis
although the rate of change was marginal during that time. But we can see a clearer picture in this current worldwide crisis and we can see that the rise in the gold rate has been accompanied by the drop in the strength of Dollar. The drop in the strength of Dollar can be attributed to the drop in fed rates, which is supposed to decrease the strength of dollars as it aims to increase liquidity in the market.
Can Gold Rates Sustain this Growth?
But when we compare the current global crisis with the Global Financial Crisis of 2007/08, the prices are growing in decreasing rate and some may even question the sustainability of this growth even though the historical trends that gold has shown over the years tell a different story. But with the Global economy slowly starting to “Survive with Covid-19, it is very hard to predict what is going to happen in the near future.
Considering just the year 2020, gold saw a decline in the month of February and a steep growth in March, when Covid-19 was declared as a global pandemic. The growth rate peaked in April and since then the growth rate has been declining consecutively for the last two months. Since $1800 was the resistance point during the previous high, the growth rate has declined as rates crossed the $1800 in July, so this time also many are expecting $1800 to be the resistance and Gold rates to not go up anymore. The last time gold tumbled, around 42% of its value was written in a period of 4 years. But the current crisis is something that the world has never seen before and still, countries worldwide don’t know what to expect in the coming days and this uncertainty can change the market sentiments at any time and Gold may go on to a territory it has never ventured before.
Prashant Ghimire
