% Gold has room to go beyond $2,800

Current price is lower than 1980 high

At $2,070 an ounce, gold touched a new high last week and has moved up more than 30 per cent since the break of Covid19 pandemic. However, when adjusted to inflation, the record price is lower than 1980 January as well as September 2011 record-high levels. This provides room for gold to move beyond $2,800 per ounce.

"Adjusted for inflation, the gold price today is $200 shy of the 2011 level and well below its January, 21, 1980 record high equivalent to approximately $2,800 per ounce in today's money," says a World Gold Council report.

Gold had hit a record high of $850 an ounce in January 1980 as investors piled up bullion to beat high inflation due to strong oil prices, the Soviet Union intervention in Afghanistan and the impact of the Iranian revolution. If adjusted to inflation, this would have translated to $2,800 per ounce in today's scenario. Similarly, in September 2011, gold had made a high of $1,920 per ounce and if adjusted to inflation, it would have been close to $2,200 per ounce.

Further, the report finds that the gold price had more than doubled from about $900 per ounce in early 2008 to its high more than three years later in the aftermath of the global financial crisis. In contrast, it has increased by 30-34 per cent since the beginning of the Covid-19 pandemic.

The current price movement of gold has been driven by high levels of global uncertainty and very low interest rates. The Covid-19 pandemic is far from over and more importantly, its impact on the global economy is yet to be determined.

Central banks have aggressively cut interest rates, often in combination with quantitative easing and other non-traditional policy measures. Governments have also approved massive rescue packages to support their local economies. These initiatives have increased concerns that easy money, rather than fundamentals, is fuelling the stock market rally and all the extra money being pumped into the system may result in very high inflation or at the very least, currency debasements.

"The re-emergence of infections seen in Japan, Australia, South Korea and Vietnam and upturn in infections seen in the US, Russia and India could trigger the reimplementation of lockdowns and containment measures. The more delayed the complete reversal of the great lockdown, the slower the economic recovery. With this background, it is hard to imagine a scenario where central banks around the world will change their accommodative stance any time soon," said Chirag Mehta, senior fund manager-alternative investments, Quantum Mutual Fund.

Further, despite record inflows into gold ETFs in 2020, gold remains an under-owned asset. The market share of Gold ETFs, compared to all ETF assets, jumped from 3 per cent to 8 per cent in the aftermath of the global financial crisis before dwindling to one per cent levels in the following years. The current figure stands at 3 per cent, indicating significant potential for Gold ETF asset expansion going forward, says Mehta.