All that glitters is paper gold amid pandemic gloom
Gold ETFS, sovereign bonds drive yellow metal to new high of ~48,380 despite little demand
Amid the gloomy economic situation, the price of gold surged to a new record in the domestic market and hit an eight-year high internationally. While in Mumbai’s Zaveri Bazaar, 995 purity gold or standard gold closed at ~48,380 per 10 gram, up around 1 per cent, in the international market, spot gold quoted a price of $1,777 per ounce, the highest since October 2012.
Financial investors are buying gold as a safe haven asset because of the rising global economic risk. Gold exchange-traded funds (ETFS) and sovereign gold bonds, both securitised forms of gold investment, are acting as the driver for the metal’s demand this quarter, pushing its price to record highs despite the absence of physical demand.
At Zaveri Bazaar on Wednesday, 999 purity gold, the international delivery standard, closed at ~48,575 per 10 gram. With a 3 per cent GST, the price of 999 purity gold crossed the ~50, 000-mark; anyone buying a 24 carat 10 gram gold coin would have to shell out more than ~50,000 (including making charges). The Indian Bullion and Jewellers Association has declared the indicative rate for 22 carat (916 purity) gold, from which ornaments are made, at ~46,920 per 10 gram, plus 3 per cent GST.
The metal climbed a new peak just two days after it closed at an all-time high of ~47,937 per 10 gram on Monday.
Debajit Saha, senior analyst-precious metals, Refinitiv, said: “Due to the lockdown in April and May, there was less than 1 tonne of imports for domestic consumption. Though the situation has certainly improved this month with the opening of key markets, the demand is estimated at 40 per cent of normal levels. However, paper gold has observed traction. Both sovereign gold bonds and gold ETFS have seen strong inflows. This sudden increase in inflows can be attributed to non-accessibility in the domestic market due to the lockdown. Nevertheless, we believe investors may continue to bet on these two products, even as physical jewellery demand is unlikely to see a resurgence until October when festival and wedding demand kicks in.”
In the June quarter, so far, gold buying in the form of sovereign gold bonds has been 6.7 tonne, with investment up to ~3,107 crore. Gold bonds are only financial instruments and no physical gold is bought in the process. In April and May for which the data is available, gold ETFS witnessed ~1,546 crore of inflows, equivalent to 3.7-3.8 tonne of gold. ETFS buy physical gold equivalent to units they sell and hence this is physical gold demand. Assets under management in India’s gold ETFS were ~10,102 crore as of May 31.
Apart from this, in the June quarter, according to an industry veteran, demand for gold is expected to be hardly 25-30 tonne, largely met with old gold lying with jewellers and refineries, and jewellery sold by customers. In the March quarter of FY20, gold demand was 102 tonne.
For April and May, most stores were closed and demand was thin. In June, wedding-related buying was witnessed but the exchange of old jewellery, too, was significant. Hence, import in this quarter may be in single digit.