Rising gold demand reflecting risk aversion in global financial system

Gold is rallying with higher US stock prices
Gold prices have started moving in a manner that would concern investors and policymakers around the world. Though they are still far from their decadal high of 2011, gold prices started rising rapidly since May . Considered as a safe haven investment, rising gold demand is reflecting risk aversion in the global financial system.

Gold is rallying with higher US stock prices, represented by the S&P 500 index, which is said to be overvalued at the moment . Meanwhile, the US dollar is also strengthening.

Yields on long-term government bonds in major advanced economies, such as Germany and Japan, has turned negative Treasury bonds yields are at a multi-decade low in the US as well. This is another marker of risk aversion. Lower or negative bond yields reduce the opportunity cost of holding gold.

At the same time, the demand for copper is falling. Copper prices are a good indicator of real investment demand in the global economy .

Back to the yellow metal, gold held in exchange-traded funds (gold ETFs are funds backed by physical gold) reached its highest since 2013 in July 2019, at 2,733 tonnes, showing preference for safe assets.

In India, gold prices have touched an all-time high, with a small correction happening last week .

Import of gold has come down . Several reports say that August imports would be at their 3-year lows. Moderation in prices is crucial for the gems and jewellery business ahead of the festive season. Higher prices could affect yet another sector and worsen the employment situation.

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