Why Gold Prices Are Rising in India?

Everything else – rupee, equity, bonds, real estate – is falling. But what causes gold prices to rise when everything else is falling? And the answer to that is a slightly longer one.

Gold is one of the most revered metals in Indian culture. From festivals to weddings to birthdays, no auspicious occasion goes by without making use of this metal. Most Indians look up to gold as a thing of investment that can be used in times of financial crisis.

In recent months, gold prices have been on a constant rise. And after the crash in March due to the lockdown, they have managed to surge and cross the 50,000 mark in July 2020 (current gold price is Rs 53,800 (as of August 2020).

Why gold prices are increasing? What affects gold prices in India? Is gold a good investment? Is now the right time to invest in gold?

Just keep reading the post to get all of your queries answered.

Factors affecting gold prices

Let us look into some of the most important factors that determine gold prices.

India Bullion and Jewellers Association Ltd. (IBJA) decides the price of the gold in India based on some factors.

1. Inflation

People walking towards a structure in shape of Indian currency Rupee

When the inflation rates rise, the value of the currency decreases. Also, most other investment avenues fail to deliver inflation-adjusted returns. This is why investors prefer to hold gold rather than currency. Even if high rates of inflation last for an extended period, gold acts as a perfect hedge since it is not affected by fluctuations in the value of the currency. This holds true for both international inflations as well as that which occurs in India.

2. Rupee and dollar exchange rate

In the international markets, gold is traded in USD. While importing, USD is converted into INR. So, any fluctuations in the USD or INR can affect the import price of gold and hence the selling price.

3. Internation gold rate

Any global movement in the price of gold affects the price of the yellow metal in India. This majorly derives from the fact that India is one of the largest importers of gold (India imports 99% of gold from other countries) and as such when the import prices change due to global movement in price, the same is subsequently reflected in the prices of gold at home.

4. Import duty and interest rates

India is the second-largest consumer of the precious metal. As mentioned, It imports a lot of gold to meet the high demand. Therefore, import duty plays an essential role in the price of gold. As import duty increases, gold prices see a rise.

Gold prices have an inverse relationship with interest rates. When the interest rates fall, people don’t get good returns on their deposits. Hence, they tend to break their deposits and buy gold instead causing an increase in demand and so the price. On the other hand, when the interest rates rise, people sell their gold and invest in deposits to earn high interest leading to a drop in demand and price

5. Demand and supply

As is true with any traded commodity, the demand and supply of gold, plays an important role in determining its price. And so, if the demand for gold increases, the price increases since the supply is relatively scarce.

Indians love their gold jewelry. Be it festivals or birthdays, gold jewelry holds a special place in Indian households. During the wedding season and also during festivals like Diwali, gold prices go up as a result of increased consumer demand. The demand-supply mismatch leads to raised prices. The demand for gold does not just end at jewelry requirements. The metal is used in small quantities by various electronic companies for the manufacturing of devices like television, computer, GPS, etc.

6. Gold reserves

gold reserves

The Government of India holds gold reserves. Based on its policies, it can buy or sell gold through the Reserve Bank of India (RBI). The price of gold can get impacted depending on whether it buys or sells more. When the central bank starts holding gold reserves and procuring more gold, the price of gold goes up. This is because the flow of cash in the market is increased while the supply of gold goes down.

Why are gold prices are rising in India now

Some of the important reasons are:

1. Circulation of gold

Gold circulates in 3 forms in the market. They are:

  • Imported gold
  • Recycled gold (gold converted into various ornaments)
  • Mined gold (procured from the gold mines)

Gold mining has been shut down in India due to lockdown. Experts say that 25,000 tonne of gold is with Indian households which is not in circulation and held as ornaments in the lockers.

These have led to importing more quantity of gold to satisfy the demand which in turn is subjected to customs duty. Hence the rise in gold prices.

2. Gold is a safe haven

When there is uncertainty in future the investment flows in the form of gold because it is deemed to be the safest asset and which has a high form of liquidity.  So the demand has increased and hence the prices.

Once investors lose hope of the markets recovering in the short-term, they tend to gravitate towards safe havens like gold.

3. Rise in international gold price

Fear-driven investment demand in developed countries has contributed about 18% to this year’s gain in gold prices internationally. Over the last few weeks, rising number of coronavirus cases, increasing US-China tensions, and overall economic slowdowns also led to a constant rise in gold prices around the world. 

As the price of gold in India is affected by its international price, there is a rise in the gold price.

4. High liquidity and low mining

The Government declared a lot of economic stimulus packages to pump liquidity into the markets. So, we had a situation where investors had money to invest but the stock markets were highly volatile and interest rates were falling. Hence, they started investing in gold that is known to be a safe investment during such times increasing the demand.

The primary factor that affects gold rates is the demand and supply equation. While the demand increased, gold mining activities were severely impacted due to lockdowns in various countries. This impacted the supply causing the prices to rise further.

Is gold a good investment?

Throughout history, gold is seen as a special and valuable commodity. Today, owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier.

As a global store of value, gold can also provide financial cover during geopolitical and macroeconomic uncertainty.

If you’ve been diversifying your portfolio over the years, chances are that gold assets in it are the only ones in green. So during times like this, you can liquidate a part of your gold to buy blue-chip stocks that are available for cheap or invest in the equity funds.

Yes, gold is considered a good investment provided how well you diversify your portfolio.

Should I invest in the gold now?

While the recent news on gold prices indicate a high demand for the yellow metal, some analysts are also predicting gold prices to touch Rs.65000 per 10 grams over the next two years. They believe that factors like low rates of interest, high liquidity, and economic impact of the lockdown will have a lasting impact on the gold price trends.

Even if the vaccine is introduced, the psychological impact of the pandemic might keep investors interested in the yellow metal for a long time. Gold will regain its position as a strategic asset and many investors will try to benefit from the positive price momentum.

All these facts might suggest you into buying gold, but making gold a part of your portfolio still depends on your perception of the market.

Final words

Given all the above-mentioned factors and views, it is important to understand the entire picture before investing. Consider the points mentioned above and ensure that you invest in sync with your investment plan and risk tolerance.

Thank you for reading. Stay safe.

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