Behind the glitter: Why is gold going up in value, how should you invest? |

The oldest class of assets — precious metals such as gold, silver, and platinum — has been among the better performers of 2024. Gold, in particular, is up 11 per cent since January. It has been hitting record highs and commodity traders expect it to keep going up.

That is 11 per cent, in terms of United States dollar values. In rupee terms, the returns are higher, since the Indian currency has lost ground against the dollar.

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Gold is not only one of the oldest known assets; though it is among the more unusual. It is near useless in industrial terms, with the very few applications such as in the decorative industry, unlike silver and platinum, both of which have large industrial footprints.

The physical yellow metal is not an interest-bearing asset either. And yet, gold is a reliable hedge against inflation and uncertainty. Moreover, it is a hard asset — it can be converted into cash easily, or used as collateral for instant loans.

Behind the glitter

Indians are among the world’s most enthusiastic hoarders of gold — households are reckoned to hold more than 21,000 tonnes. It ranks just below oil and gas on the import list, although, as part of an effort to curb imports, the government has introduced several innovative schemes to wean people off the physical metal.

So why is gold going up in value?

There are quite a few answers and they are linked. First, inflation. Covid-19 scrambled global value chains. Then the Ukraine War scrambled them all over again. Shortages and supply disruptions in energy, semi-conductors, pharmaceutical drugs, food, and what-have-you have meant high inflation.  

Not only does the Ukraine War continue, the Israel-Gaza War has now created new tensions. A blockade of the Red Sea by the Houthi, and fears of escalation if Iran gets into the act, have triggered fresh fears of disruption of oil and gas. This could mean another round of inflation.

A second set of uncertainties also arises due to possibilities of multiple regime changes. Around 40 nations, including India and the United States, are due for elections in 2024 (or have already had election, as in the case of India’s neighbours). Those affect 4 billion people, and therefore, investors have to factor in political uncertainty, and inevitably, uncertainty also leads to fresh demand for gold.

Supply side

There is very limited new supply. Gold has to be mined and global production is only around 3,100 tonnes of which China produces around 10 per cent.  In 2023, around 4,450 tonnes were traded, and that was 5 per cent lower than in 2022. The Federal Reserve alone holds more than 9,000 tonnes of gold. India imported around 750 tonnes in calendar 2023 at a cost of Rs 2.8 trillion.

Demand therefore exceeds supply, which is one reason gold often beats inflation. Demand has historically exceeded supply except during brief periods, when new supplies have been discovered, such as the colonisation of South Africa, the colonisation of the Americas, the gold rush in California (1849) and The Yukon (1890s). Commodity traders believe this bull-run could last till 2030.

India’s policymakers have a love-hate relationship with gold. On the one hand, the RBI buys gold (it is buying now). But policymakers dislike the fact that private citizens also buy gold. In 1968, the Gold Control Act prohibited jewellers from keeping more than 100 grams of gold in inventory and banned ordinary citizens from holding coins or bars — they could only keep jewellery.

This Act generated lots of employment for huge gangs of smugglers. It also gave rise to the romantic legend of the Robin Hood smuggler, which inspired many Bollywood megahit movies (think Deewar).

After the Act was repealed, India’s jewellery industry has done a terrific job, deploying creative design and innovative processes to service domestic and global demand. Titan’s Tanishq is the world’s most valuable jewellery brand, for example, and there are many other highly-regarded…