Gold prices have been on fire.
Between 9 March and 24 March, they rose by 8.2% to ₹59,545 per 10 grams. A savings account, in comparison, pays 3-4% per year and most one-year fixed deposits are paying around 7% currently. Of course, these are guaranteed returns, and there are no guarantees on gold returns.
Further, the rise in gold prices has led to a slew of stories in the media asking the proverbial question—is this the right time to invest in gold? The trouble is that this is not a straightforward question that can be answered with a simple yes or no. Indeed, the question cannot be answered without going back a few years and understanding how the financial system really works, the instabilities that are built into it and the impact they have on the price of gold.
During the course of this month, the world has come to know that quite a few small-and mid-sized American banks are in trouble. Along with this, Credit Suisse, a perennially troubled big Swiss bank, was rescued by its rival UBS. There is also the risk of contagion spreading to other banks. These troubles show the instability of the financial system as it exists through much of the rich-world.
In such a scenario, money has moved to gold and driven up its price over the last few weeks. Over the centuries, gold has been looked upon as a safe haven, where money rushes to when things get a little difficult in the financial system. The question is how did we get to this stage this time around.
FED’S WRONG BET
The covid pandemic broke out in early 2020. Jobs were lost and incomes came down pretty quickly. Central banks all over the world, including the US Federal Reserve, printed money and pumped it into the financial system, to drive down interest rates to help consumers, corporates and governments.
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