Gold sets for bigger return in Covid 19: An Analysis

The economic situation has seen a drastic and a lot of people have suffered a loss of job. The exact course of the financial markets, but gold has certainly reacted in a predictable way keeping in mind the value and providing financial safety.

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Gold Rates during Pandemic.
Gold Rates during Pandemic. Image Source: EconomicTimes.com

Old is Gold- here goes the saying. The economic, social, and financial fallout from the Covid-19 pandemic will almost certainly continue for a prolonged period. The economic situation has seen a drastic and a lot of people have suffered a loss of job. Now it is not possible for any of us to commit if the financial condition would improve or not. The exact course of the financial markets, but it has certainly reacted in a predictable way keeping in mind the value and providing financial safety.

According to the recent report by one of the international consultancy firms, KPMG, it is estimated that 65% of $46 billion gold loan industry is dominated by informal lenders, whose interest rates can range from 25% to 50%. In many parts of India, particularly rural areas, the pawning of the ornaments of a woman is often viewed as the last recourse for families who have run out of options.

Recent reports according to the World Gold Council estimates that Indian households are sitting on a $1.5 trillion hoard of gold, the biggest of its kind, largely made up of jewellery, which families often inherit or are gifted at weddings. It is an item which is not used for daily purposes but is worn only for weddings. It also doubles up as an insurance policy and retirement plan in a nation lacking robust social welfare systems

It has been observed that gold has performed well as Covid-19 has impacted markets. The Covid-19 pandemic has prompted a widespread reassessment of global economic prospects, investors have rotated into safe-haven assets, including gold. It has been one of the best performing safe-haven assets this year.

According to a survey conducted recently, between 1 January and 20 April 2020, gold outperformed US treasury bonds and bills, USD-denominated investment grade US agency and corporate debt, and Eurozone sovereign bonds. Higher allocations to gold have improved the performance of a typical central bank total reserve portfolio during this crisis period.

With transaction times to process gold loans falling to less than an hour and collateral that’s easy to sell in the event of default, the market for such lending is set to expand by at least 34% to ₹4.6 lakh crore ($61 billion) in two years to March 2022, according to an estimate by KPMG.

Banks have long had a limited presence in the loan industry but are attempting to make bigger inroads this year as other sources of income have dried up.

Looking ahead, it is too unpredictable the financial turmoil unleashed by Covid-19 is yet another test of reserve managers’ ability to strike the right balance between safety, liquidity, and return in their portfolios. Now, as in previous crises, it remains an indispensable central bank reserve asset.

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