Covid 2.0 may dent the golden appeal of Akshay Tritiya

Akshay Tritiya is considered an auspicious occasion to start new things and make valuable purchases. Indians have a special attachment to gold, and over the years, have continued to import gold in huge quantities to fulfil their insatiable desire for the yellow metal.

While Indian attraction to gold is unparalleled, demand is highly sensitive to growth and price.

Last year, based on data from the World Gold Council, Indian consumer demand fell over 35 per cent, leading to a sharp drop in imports. The Indian and global economies contracted sharply last year as Covid-19-related restrictions impacted activity. Meanwhile, gold prices jumped to record high levels both in domestic and international markets.

However, the scenario has changed this year. The growth outlook has improved significantly while gold prices have corrected from the highs. The correction in global gold prices and the Indian government’s decision of lower import duty have pulled domestic prices well off the highs.

We are in a different and difficult situation at present, and it is set to dent the golden appeal of this festival. India is currently facing a second and much severe Covid-19 wave. Many states have imposed strict restrictions while calls are increasing for a nationwide lockdown.

The restrictions have already started to impact activity in the physical market as is evident from the domestic gold price, which is trading at a marginal discount to international rates.

Given the rising graph of coronavirus cases in many states, it is likely that we may see subdued activity this Akshay Tritiya. However, there are still enough reasons to remain invested in gold. So what may happen is a possible delay in purchases.

Gold corrected sharply as researchers found success in the vaccine for Covid-19. However, the slow and uneven vaccination process and the multiple waves of infection seen in various countries reflect that the pandemic is far from over. And this may keep gold’s safe-haven allure high.

Also, the huge monetary and fiscal expansion done in the last few months threatens to show effect in the form of currency devaluation, inflation and rising deficits, and market players may want to remain invested in gold to safeguard themselves.

We are already seeing some nervousness in equity markets and even a sizable correction may benefit alternative assets like gold.

Historically, India’s demand for gold is largely concentrated in jewellery. However, its importance as an investment vehicle has increased in these uncertain times.

The investment appeal of gold has also risen amid increasing alternatives. Apart from buying physical gold, investors can go for gold-linked assets such as Sovereign Gold Bonds, gold ETFs, gold mutual funds or gold derivatives, where one can invest in the yellow metal and benefit from the price movement without actually holding it.

(Ravindra Rao, CMT, EPAT, is VP-Head Commodity Research at Kotak Securities)

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