Gold prices have appreciated by a whopping 32% since Diwali last year. This statistic should put to rest all the noise about plunging gold demand hurting gold’s prospects in 2020. Skeptics are missing the big picture, investment demand usually is the driver for higher prices and consumer demand acts as a floor. And this time is no different.
Globally, demand for gold mainly comes from 5 sources - jewellery, bars and coins, investment demand through Gold ETFs, central bank demand and use in the technology sector. The first source, which is mainly for consumption purposes, usually accounts for ~50% of total demand.
In India, this demand is influenced by income levels, gold price levels and seasonal factors such as wedding seasons, religious festivals, harvests and the monsoons.Covid-19 induced lockdowns have led to widespread unemployment and losses and hurt household income levels this year. In addition, social distancing measures and other restrictions have led to fewer marriages and modest festival celebrations. The combination of these factors along with higher gold prices has hurt Indian jewellery demand with demand plunging 48% year-over-year in the third quarter (July to September) of 2020. Global jewellery demand, which is majorly driven by Indian and Chinese demand, as of September end stands at only 900 tonnes, compared to 1500 and 1600 tonnes in 2019 and 2018 respectively. This weakness in consumer demand has led to the perception that gold prices are set to weaken.
Record investment flows offset consumer weakness
In the midst of the uncertainty created by the pandemic, global investment demand for gold drove up prices to new highs of around ~2000$/ounce as investors chose to park their money in the relatively safer asset class. As per the World Gold Council, global net inflows of 1,003 tons in 2020 have taken gold ETF AUM to an all-time high of 3,880 tons or US$235 billion as of September.Closer home, the ~7800 crores of inflows that Indian Gold ETFs have received this year as of September end is a reflection of that. Gold prices in India are up by ~30% this year!
Data as of September 2020
In addition to ETFs, preference for gold as an investment is indicated in the robust bar and coin demand this year, which is already at par with last year’s demand of ~625 tonnes, with three more months to go before 2021. But the fall in bar and coin demand as a share of the total investment demand is noteworthy. From 62.5% in 2019, the share has fallen to 38.5% this year indicating that investors are evolving and choosing the more efficient investment avenue - Gold ETFs / Funds.
The trend of investment flows into the asset class is likely to continue well into next year supporting gold prices. That’s because the Covid-19 pandemic is far from over, we are in the midst of a deep global recession, central banks are injecting liquidity and purchasing assets, interest rates globally continue to stay low, government debts and deficits are inching up, threat of inflation is looming, currencies continue to be debased and geo-political tensions are rife.
Gold, because of its characteristic of being a stable form of money with potential to store value over long time periods and its tendency to appreciate in times of negative real interest rates or when there is a loss of confidence in the economy and monetary system, will benefit as a result of the above macroeconomic circumstances.
Consumer demand set to improve
Though consumer demand during the fourth quarter is expected to be lower than last year, as the pandemic continues to rage, hurting consumer incomes and sentiment, India is likely to see a healthy rebound in gold jewelry consumption over the next year. India has about 10 million marriages a year and those would have reduced to just a small fraction this year, most of them postponed. As the economy opens up and more marriages take place, demand for gold should rebound. A better monsoon and the upcoming festive season should further aid the uptick in gold demand.
So if you’re wondering whether you should buy gold this Diwali, go ahead and add that touch of auspiciousness. The outlook for gold prices looks positive over the near to medium term. And if you’re taking a cue from the massive global investment flows the metal has been attracting, have a long term view and see gold for the strategic asset it is. Buying gold can be a good financial move as the asset plays a risk-reducing, return enhancing role for your money. Buying the Gold Savings Fund, which invests in a Gold ETF, can be an ideal and convenient way to efficiently invest in gold
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