Unlike the west, celebrations are a big thing in India, especially weddings. Like spring and autumn, Indian weddings also have seasons based around the same time, and it’s not just a big family get-together, but also a huge marketplace for various businesses in India. However, with social distancing norms in place, the business surrounding weddings and the festivals have been ruined in the pandemic year. As families purchase gold jewellery on weddings to gift and on festivals as a tradition, India is one of the largest consumers of gold bars. Unfortunately, this year with a loss of savings, businesses sluggish and fear of health, people have refrained from buying. The demand drop is so bad that Metals Focus Limited has estimated Indian gold jewellery consumption is likely to decline by 36% this year.

And yet, strangely, the Gold market has seen the biggest rally in gold prices ever. Gold which traded at around INR 40,200 (10 grams of 24 carats) at the beginning of the year, is now trading at INR 53,650 with a peak of INR 58,050 on August 6. What’s happening? Did we miss something? Indeed, because someone else is buying the gold.

Who is buying gold?

The investors are buying the gold – not physically, but the derivatives of the same. Investors look for return against their investments. And if the market is not safer, they look to park it somewhere till the markets stand up again. This acts as a cushion against their investment portfolio and way to safeguard the money when the markets go upside now. With the global pandemic, the capital markets went haywire and erratic. The obvious move would be to switch to debt investments, however, even the interest yields are at an all-time low. So where would the investors go? Gold! That’s what led to the rally – investors selling off from capital markets, withdrawing from debt markets and putting all their money in Gold.

Why put away money in gold?

Because gold is an excellent ‘store of value’. What does that mean? Everything depreciates over time –vegetables and diary perish immediately, products and services go outdated, trees and plants wither away, money is discounted by inflation and even the humans die, however, that is not the case with gold. Gold does not wither away, doesn’t perish, not discounted by inflation nor does it get outdated – it stays the same, forever! Thus, your investment in gold stays safer even over the years. So, if you are looking to preserve your wealth – gold will store your wealth. Amid global pandemic, investors are looking to preserve their wealth, hence, putting away money in gold.

Why is gold the standard store of value?

Gold has been used since ancient civilizations as system to trade or alternative to currency. This is because of the peculiar attributes of gold.

  1. Durable – Gold can easily be carried on over generations. Unlike most other metals, gold does not get corroded. This may not be the case with metals such as iron or even paper money.
  2. Portable – Gold is extremely dense which makes it easier to carry and handle as compared to oil or most other metals. If one wishes to put away entire wealth, gold can easily carry a huge value in a small bag at the times of crisis, which is not the case with other metals.
  3. Liquid – Gold does not have many grades unlike diamonds or even land. This makes it liquid and easily transferable.
  4. Stable – The supply of gold isn’t going to shoot up in a day or even over years. It is stable and new gold mines don’t seem much likely. Unlike currency whose supply can easily be managed by the Governments or values can easily be debased by an order.
  5. Trust – Valuation of land or even diamonds are quite complex as the quality of asset cannot be measured reliably. However, the purity of gold can be easily tested anywhere in the world, while counterfeit notes are difficult to trace. This makes gold a lot more trustworthy over the years.

What if the prices of gold fall?

Gold is a limited resource and also not a consumable. It cannot be produced nor does it get destroyed. Thus, it only changes its form and hands, while the quantity on the globe remains almost constant. Since it is an excellent store of value and does not depreciate, the price of gold in the world fluctuates with its demand as the supply is constant. Thus, in a pandemic, where the investors have chosen to put their money in gold, the demand will only result in higher prices until the other investment products provide better returns e.g. increase in interest rates or confidence in the equity market. Historically, it has been proven that whenever interest rates have decreased, gold rates have always rallied.

So, is gold a good investment product?

Well, that’s where most people go wrong. Prices fluctuate with demand-supply. In the case of gold, the supply is constant and demand always exists. Thus, if you buy gold in India and sell in the United States, you are merely making profits out of the exchange rate between the two countries and not the value of gold. When you buy gold today and sell it tomorrow in the same currency, you merely saved from inflation or hurt by deflation.This is because gold and currency values are interlinked. When a country imports gold, it reduces the supply of domestic currency, making the value of currency weaker, and vice versa. Thus, more exports lead to a stronger currency and more imports lead to a weaker currency. In brief, gold retains the value of your wealth, it does not increase your wealth. It’s a safe haven, not an investment product, as investments are for increasing wealth, gold only retains it, safe from inflation and other factors.

It’s a good idea to keep your wealth in gold to safeguard it over generations. However, to grow your wealth, you must invest where it grows.