COMMENT – Gold stuck between vanity, frugality and investment needs

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Photo by Ramiro Mendes on Unsplash

Gold prices hitting the roof with each bad news during this pandemic crisis is evident. The well-accepted theory that the yellow metal shines when real interest rates are very low or even negative is coming true for gold.

So far this year, the gold price has gone up by over 12% on the back of a surge in global investment demand. That follows an 18% gain last year, on broader global growth fears.

Gold prices are soaring higher than $1,750 per ounce in the spot market as darkening clouds of risk to the post-coronavirus recovery and to global trade have enveloped the narrative and helped return some of the precious metal’s strength as a primary safe haven investment.

As fears grow over a second wave of Covid-19 outbreak just when the global economies are beginning to open up, gold as an investment option is looking more and more attractive.

China and South Korea are on alert once again as they face a rising number of new infections. In the US, the state of Texas recorded its largest daily increase in cases and deaths last week since the start of outbreak. India is almost reaching 100,000 positive cases even as lockdown restrictions are being relaxed urgently.

The potential of another surge in Covid-19 cases, combined with weak economic data coming from major markets raises more uncertainties for a near-term recovery, making safe-haven assets like gold more attractive to investors.

India seems to be caught between the devil and the deep sea.

Gold prices in India are flirting around Rs 49,000 per 10 grams of gold, reiterating gold’s lucre as a great investment option. However, domestic sale is down in the dumps.

The lockdown kept most jewellery shops shut, weddings got postponed, the cash rich from rural India were gripped by a fear psychosis, and all retail sale of gold jewellery has either been postponed or cancelled for definitely a very long time. Add to this the depleting economic growth and increasing fiscal deficit forecasts, the retail gold market in India will be subdued at best and panicky at worst.

Amid heightened volatility and uncertainty, central banks continued to amass gold, although at a slower pace. Global gold reserves grew by 145 tonnes in the first three months of this year.

The lockdown also impacted supply of gold. Many mines, particularly in South Africa, had to shut operations However, a series of mergers, acquisition and strategic alliance deals are taking place behind the scenes to capture the supply source of gold. Gold miners are forging ahead with mergers and acquisitions. 

Despite the logistical problems the pandemic has created — both for operations and for arranging face-to-face meetings to hammer out transaction details — consolidation is picking up steam.

In a sharp contrast to broader M&A activity across the globe, where almost $16 billion of mergers, acquisitions and investments have been terminated over the past 30 days, the gold industry is bucking that trend as investors rush to bullion while fleeing risk assets including equities and oil.

Colorado-based Alacer Gold Corp. is tying up with Vancouver-based SSR Mining. Gran Colombia Gold has submitted a proposal to buy Guyana Goldfields in another all-stock deal.

Gran Colombia is also said to be buying Colorado-based Gold X Mining Corp. Canada’s TMAC Resources has announced to buy China’s Shandong Gold in a deal valued at about $149 million.

Tie-ups between smaller miners have accelerated after 2019 marked a bumper year for gold deals, which kicked off with a $10 billion mega-merger between then Newmont and Goldcorp.

A number of companies, including Newcrest, added individual mines while others — including Kirkland Lake Gold Ltd. and Zijin Mining Group Co. — acquired smaller rivals.

Just last month, Newcrest, Australia’s top gold producer, said it plans to raise as much as A$1.1 billion ($720 million) in a share sale to accelerate its growth pipeline and extend its cash flow exposure to a key mine in Ecuador.  

Gold demand will continue to feel the effects of Covid-19 for the rest of 2020, and perhaps even in 2021. The shining metal will continue to burn the jewellery seekers for a long time.

While gold continues to be great bet for investment, in the battle between personal vanity and frugality, the latter is likely to win!  

(Columnist Shekhar Ghosh is a communications and content specialist with deep interest in commodities)

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