Gold hits record high on global banking turmoil

The price surge of almost 5% in just a week has dampened consumer demand for the precious metal. However, those invested in sovereign gold bonds and gold ETF schemes of mutual funds have seen the value of their holdings rise.

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“It’s a flight to safety,” said Shekhar Bhandari, president of global transaction banking at Kotak Mahindra Bank. “There is a challenge of liquidity, thanks to rising rates in the US and Europe, and banking crises in those parts of the world, which have turned investor sentiment to risk-off, with riskier assets like stocks and bonds tumbling. This is the best phase for gold, whose safe-haven appeal could continue for the next few quarters.”

Gold acts as a hedge against inflation and a safe-haven asset during times of uncertainty. The metal’s surge comes as US Fed and ECB rush to create backstops, with three banks in the US collapsing in the past week, and Credit Suisse being taken over by UBS in Switzerland amid a rising interest rate regime in those geographies. It also comes ahead of the Fed’s rate-setting committee set to hike a benchmark interest rate on Wednesday. However, with India being the world’s largest gold importer, having imported a gross of 763.7 tonnes of bullion last year, a sudden rise in dollar price and a weaker rupee hurt domestic demand for the precious metal.

“Consumer demand has been hit badly by the current price rise,” said Debajit Saha, lead analyst at Refinitiv Metals, LSEG. “Lack of demand is evident from the $33 an ounce discount ( ₹840 per 10 gm) in the wholesale gold market here to the bank rate.”

Gold comes into the country primarily through RBI-authorized banks which import the metal on a consignment basis.

However, investment demand through sovereign gold bonds re-launched by the government in 2015 has begun to gain traction, with 98 tonnes worth ₹42,955 crore outstanding with subscribers as of 27 December 2022. This compares with ₹21,400 crore of net assets under management by gold ETFs. “Gold on the domestic front hit a new lifetime high of over ₹60,000, as a wave of banking crises shook global markets and put bullion on track for its biggest weekly rise in three years,” said Navneet Damani, senior vice president of commodity research at Motilal Oswal Financial Services. “The broader trend on (US-based exchange) COMEX could be in the range of $1,985-2,015 an ounce and on domestic front prices could hover in the range of ₹59,800–60,600 .”