Fresh Investment in Gold Sparked by Liquidity in Global Equity Markets

New Delhi, April 14 (IANS) The risk on trade in global markets is witnessing a huge rally in equities as well as gold. There is an emerging view that the rally in gold is being fuelled by the surge in equities.

According to global bank HSBC, “Record-high gold prices have accompanied record-high equity valuations. The wealth and liquidity effect of higher equities may allow for the purchase of more gold, than would otherwise be the case.” Analysts have pointed out that the gold rally is not being explained by the traditional factors and new dynamics are in play.

Wall Street marquee firm Goldman Sachs stated, “EM Central Banks’ accelerated gold accumulation has been catalysed by sanctions fear, reinforced by a preference to hold gold directly. Meanwhile, Asian retail demand, led by China, has been driven by fear over economic stability and currency depreciation, particularly tied in China to the property sector.” Despite the market pricing progressively fewer Fed cuts and record equity markets, gold has rallied 20 per cent over the past two months.

Jefferies analyst Christopher Wood remarked, “For now at least there continues to be a notable lack of inflows into gold ETFs in the Western world. It is also the case that, while gold mining stocks have rallied this year, they are not really outperforming bullion on the scale which would normally be expected to happen in a roaring bull market.” The reasons behind the current gold rally remain unclear.

The rally in gold seems to be aided by the safe haven hedge against equities. Global bank HSBC mentioned, “Concerns over the length and breadth of the equity rallies worldwide have led some investors, including large institutional investors, to hedge their bets by safeguarding equity portfolios with some gold.” The substantial purchases of gold have materialized led by asset and portfolio managers as well as insurance companies and pension managers.

Christopher Wood raised the question as to why gold is rising now than why it has not risen by much more in recent years. He highlighted the unprecedented expansion of G7 central banks’ balance sheets from $5.5 trillion in March 2009 to a peak of $25 trillion in February 2022 and now standing at $19.6 trillion.

In conclusion, while the reasons behind the surge in gold prices remain ambiguous, the current rally is driven by a combination of factors such as fear over economic stability, currency depreciation, and the need to hedge against equity market risk. The dynamics of the market suggest that new players are entering the gold market, further emphasizing the unconventional nature of the current gold rally.