Gold has been one of the most traditional forms of investment.
In India, major demand for gold comes from jewellery. Gold jewellery has been one of the primary modes through which Indians have parled their money. Over the years, investing in gold has evolved as an ideal hedge for volatile markets as a lot of times stocks and gold move in either directions.
While a lot has been said about factors that affect the stock markets, many investors are oblivious to what causes gold prices to rise or fall. Here are some common factors that cause a change in price:
As is true with any traded commodity, the demand and supply of gold, plays an important role in determining its price. Unlike oil, gold is not a consumable product. All the gold that has ever been mined is still available in the world. The amount of gold mined every year is not very high. If the demand for gold increases, the price increases since the supply is relatively scarce. Hence if you’re wondering why gold price is rising, demand-supply conditions may be one of the reasons.
When the inflation rates rise, the value of the currency decreases. Also, most other investment avenues fail to deliver inflation-beating returns. Hence, most people start investing in gold. 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.
Gold prices have an inverse relationship with interest rates. When the interest rates fall, people don’t get good returns on their deposits causing an increase in gold 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.
In India, gold jewelry is integral to most religious festivals and weddings. That is why, during festivals and wedding seasons, the demand for gold increases, boosting its price. This is one of the reasons why why gold rate increase in India.
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. Therefore if you are wondering why the gold price is rising in India at any given point in time, government purchases and sales is also something you should look at.
India contributes less than one percent to global gold production. However, it is the second-largest consumer of precious metals. It imports a lot of gold to meet the high demand. Therefore, import duty plays an essential role in the price of gold.
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.
These are some common factors that affect the price of gold. With this understanding, let’s look at why gold prices have been increasing in recent weeks.
Also Read: Best Ways to Invest in Gold
Many investors are concerned with the sudden surge in gold prices. Why is gold rising? Is this normal? Should they invest in gold at such high prices? Or, is this a bubble that will burst soon? To help you find answers to such questions, we have listed the factors that may have contributed to the surge in gold rates in recent weeks.
Since March 2020, to curb the spread of COVID-19, most countries have implemented nationwide lockdowns. While this brought the spread of the disease under a reasonable amount of control, it also caused a lot of economic disruption since businesses were shut and imports and exports were canceled.
While the government announced several economic packages to support people during these times, interest rates slumped and many investors started moving away from risky assets. This increased the safe-haven appeal of gold and probably a reason why gold rate increase in India.
But, the lockdowns had started in March. Why have gold prices started surging now?
Initially, investors hoped that the economy would recover quickly as the lockdowns were lifted and companies resumed operations. And so, many investors started buying undervalued, high-quality stocks. However, with time, the hopes of a near-term recovery got dampened and investors started looking at a safe haven for their funds.
Since gold is considered to be a perfect hedge against inflation and economic turmoil, the demand for gold increased.
The RBI allowed borrowers to avail of a moratorium on loan repayments till August 31, 2020. The Government also 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. This is also one of the reason for gold price hike.
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. Reduced gold mining means lower supply and can be a reason why gold price is increasing.
The Indian Rupee has fallen sharply since the lockdown. Currently, it is around 75 against the US dollar. Since India is the second-largest importer of gold, such exchange rate fluctuations impact gold prices.
The price of gold in India is affected by its international price. Over the last few weeks, rising number of coronavirus cases, increasing US-China tensions, and overall economic slowdowns have led to a constant rise in gold prices around the world.
Once investors lose hope of the markets recovering in the short-term, they tend to gravitate towards safe havens like gold. While that explains the rise in gold prices, is it likely to continue?