Editorial

Gold rush: on yellow metal touching ₹33,800 mark in Mumbai

Gold is shining once again. The price of gold in the Indian market reached its highest-ever level, hitting the ₹33,800 mark in Mumbai on Tuesday in the midst of increasing demand from buyers and lagging supply in the global market. And it is not just the rupee that is witnessing a fall in value against gold. A similar trend has been seen in the price of other major emerging market currencies as well when their worth is measured against the yellow metal. In fact, many emerging market currencies have already hit, or are quite close to hitting, historic lows against gold. Against the U.S. dollar, however, gold is still priced well below its all-time high of over $1,500 that was reached in 2012 even as it has shown some appreciation against that currency in the last few months. The increase in the price of gold worldwide should be seen against the backdrop of rising uncertainties that threaten to derail the global economy. Western central banks have been tightening their monetary policy stances for a while now, leading to increasing fears that this could put an end to the decade-long recovery since the 2008 Global Financial Crisis. The U.S. Federal Reserve has been at the forefront of the current tightening cycle. The resulting flow of capital from emerging markets to the West has put further pressure on various emerging market currencies. The rupee, for instance, has depreciated significantly in value against the U.S. dollar in the last year alone. This probably explains the divergence in the performance of the dollar vis-à-vis other emerging market currencies against gold. The U.S.-China trade war and the lowered rate of Chinese economic growth have added to fears of a global economic slowdown. Furthermore, as stock markets around the world continue to trade sideways with increased volatility, investors seeking financial safety have turned to gold and boosted its price. Many central banks have been trying to hoard gold to restore confidence in their currencies.

Apart from these short-term influences, there are probably other long-term secular factors at play as the price of gold looks to shoot up towards new highs. The fall in price after 2012 led to a fall in capital spending by gold miners, which has meant that supply has failed to keep up with growing demand. This is typical of all commodities that see years of oversupply that lead to a price slump followed by years of under-supply that leads to a jump in prices. The depreciation in the value of national currencies against gold is also an indication of the increase in inflationary pressures across the globe. What could put a premature end to gold’s rally is the easing of policy by global central banks. While this will restore investor confidence in the global economy, it carries with it risks linked to debt-fuelled growth.

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Printable version | Jan 22, 2021 5:39:58 AM | https://www.thehindu.com/opinion/editorial/gold-rush/article26131780.ece

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