Gold hits a new record high of Rs123,800 per tola

KARACHI: In line with the recent trend, the price of gold in Pakistan reached a record Rs123,800 per tola on Monday, which is Rs1,500 more than Saturday’s closing at Rs120,500.

Commenting on the recent surge, Karachi Sarafa Association President Haji Haroon Rasheed Chand said, “Due to low purchasing power in Pakistan, we have the cheapest gold in Asia. We are still under cost by Rs2,000 per tola in comparison with international markets.”

However, Chand also commented on how the difference between local and international rates has been shrinking. He feels that if gold breaches the $2,000 level, local prices will cross Rs130,000 per tola.

WHAT’S CAUSING INT’L GOLD RUSH

The price of yellow metal on Monday crossed its previous all-time high set in 2011 by an upwards of $20 following growing concerns over the dwindling global economy and strength of the USD.

Spot gold climbed to $1,944.71 an ounce, beating the previous all-time high set in 2011 by more than $20 or 2.2pc, making it one of the best performing asset classes.

Investors have turned to gold as the pandemic hit the global economy and its growth, thus marking itself as a safe haven. However, the rally in gold is primarily because it is a hedge against the weakening dollar, geopolitical tension, inflation, and central bank stimulus measures.

The dollar index, which measures the currency against a basket of trading peers, fell as much as 0.5 per cent to its lowest level since June 2018.

There is concern over the possibility of stagflation. Stagflation in simple terms is slow or sluggish growth whilst inflation is in an upward trajectory. As a result of this phenomenon, the value of fixed-income investments fall. Thus, investors park their money in gold in order to preserve value and end with a capital gain.

A strong relation between gold prices and the US bond market can be seen whereby gold lures in more investors as a hedge on treasuries, especially considering the real income from them to be below zero per cent in the current scenario.

“Gold will continue to trade higher as global interest rates are lower than the previous high of gold yields,” said Adnan Sheikh, senior financial analyst.

With tensions increasing between the US and China, gold prices are likely to rise. Moreover, the tensions between India and China, two major markets for physical gold is also an alarming situation which is adding to the uncertainty. Chand believes that even if the US China tensions were to cease, gold is still likely to lay above Rs 100,000 a tola in Pakistan.

WHY IS GOLD RISING WHILE RETAIL SALES ARE FALLING?

Domestically, gold sales are at a low despite the summer usually being a peak gold purchasing season. However, Pakistan is not alone in this regard.

Speaking to Profit, a jeweller in Karachi said, “No one is buying gold. Most of the customers are coming in to sell gold either for liquidity purposes or to realize the capital gain they have made.

“This is usually peak demand season keeping in mind how there are a number of weddings scheduled for the summer, however, the lockdown has completely crushed the purchasing power.”

If the price of gold continues its upward trajectory, retail purchases are likely to lay low and only done when absolutely necessary.

While Pakistan’s demand for gold is negligible in terms of international demand, there has been a reduction in the retail purchasing of gold globally, particularly in China and India. Despite that, western investors are overcoming this deficit in demand for physical gold.

As per data compiled by Bloomberg, inflows into exchange-traded funds this year are near the highs obtained in 2009. Most of these inflows are from North America and Europe. Total holdings have surpassed 600 tons this year and ETF inflows have exceeded retail purchases in China and India in the first quarter of 2020. This was last seen in 2009. The second quarter is likely to follow a similar pattern.

On the flip side, demand for physical gold remains weak in China and India, two of the largest buyers of gold bars, jewellery and coins. At first, this was due to the coronavirus induced lockdowns, however, the trend continued due to the scaling prices of gold making it unattainable. As per the China Gold Association Chief Executive Officer, Chinese gold sales are 30pc lower than in 2019.

Analysts believe that western investors will remain interested in gold ETFs regardless of subdued demand for physical gold in Asia. However, if a rebound in Asian purchases is witnessed, gold prices will substantially rally up.

Interestingly enough, New York traders have imported gold and added an upward of 700 metric tonnes of gold following the virus-induced lockdown resulting in rising COMEX inventories. This addition of gold to vaults was last witnessed in 1993.

WILL THIS TREND CONTINUE?

According to analysts, gold may consolidate soon before setting beyond $2,000. This is keeping in account the profit-taking investors may incur.

The Japanese yen, another perceived haven, strengthened 0.6pc to a four-month high of ¥105.50 per dollar.