Why Gold Prices Have Surged To A New High In India

Why Gold Prices Have Surged To A New High In India

by M R Subramani - Thursday, July 23, 2020 05:04 PM IST
Why Gold Prices Have Surged To A New High In IndiaIndian shoppers look for gold jewellery and ornaments. (NARINDER NANU/AFP/Getty Images)
  • Here’s why gold prices are soaring in India.

Like Reliance shares, gold prices have hit a new high in India. Yesterday (22 July), prices for pure gold ruled at Rs 50,550 per 10 gram in Mumbai. Ornament or 22-karat gold are on the verge of hitting Rs 50,000 per 10 gm.

Globally, gold prices are ruling at $1,877 an ounce. Prices are up nearly 32.5 per cent since the beginning of this year. This means if you had invested Rs 100 in gold at the start of this year, the value of your investment would have increased to Rs 132.35 now.

Though gold prices in India have hit a new high, globally they are still off the record $1,917.90 rate witnessed on 23 August 2011.

According to Bannockburn Global Forex, the yellow metal could top $2,000 due to a falling dollar.

Why Is The US Dollar Under Pressure?

The dollar has been under pressure since the outbreak of the novel coronavirus pandemic. The pandemic’s spread in the US and fears that a vaccine to tackle the pandemic is unlikely in the medium term besides a slow global economy have affected the greenback.

In the last three months, the dollar index, the value of the US currency relative to a basket of currencies, has dropped nearly 6 per cent to 94.95 now.

Why Is Gold Rising When The Dollar Is Falling?

Gold is an asset and a haven that is handy anytime. In fact, people tend to store gold during times of global crises such as wars or unrest. But its value fluctuates often due to currency movements.

Gold is primarily traded in dollar. When the value of the US dollar increases, gold becomes dearer in other currencies. Therefore, its prices tend to drop.

The vice versa happens when the value of dollar falls as gold becomes cheaper in terms of other currencies. Thus, its prices rise.

Other Reasons For Gold’s Rise

Gold prices have also gained on concerns over deteriorating relations between China and the US. The latest in their souring bilateral relationship is the Donald Trump administration ordering the closure of the Chinese consulate in Houston, Texas.

Tensions between the US and Iran over the latter’s nuclear programme are also aiding a firm trend in the yellow metal.

Fears of global and the US economy being hit by coronavirus have resulted in investors shifting out of equities market to gold. This is because investors think investing in gold than in equities will help. Their strategy seems to be paying off given the stupendous rise in the yellow metal’s price.

Though stock markets have bounced back from the lows seen in March this year, investors are still wary of the pandemic striking across the world again.

According to the World Gold Council (WGC), an organisation of gold producers, the International Monetary Fund has projected a 4.9 per cent contraction in the global economy this year due to high levels of unemployment and wealth destruction because of coronavirus impact.

WGC says the fear of global economic contraction has resulted in gold outperforming other assets this year.

Though hedge funds have dropped a tad their speculative bets that gold will rise, analysts say the uptrend is seen continuing in the long-term.

Bannockburn Global Forex chief market strategist Marc Chandler says that upside is still likely in gold and the $2,000 target is only a conservative estimate.

Why Have Indian Gold Prices Run To A Record

For many in India, the rise in gold prices is surprising. This is because demand in India, one of the world’s top consumers of the yellow metal, has been low ever since the outbreak of coronavirus.

Logically, it is not a good sign for gold to rule so high since it will likely turn away the people from buying gold. In cities such as Mumbai, people usually utilise the situation as opportunity to sell gold.

According to the WGC, India’s demand for gold has been dropping over the last few years and during January-March this year, it fell 41 per cent. The fall in demand was because gold prices, on an average, increased 25 per cent during the quarter.

In April this year, gold imports into the country nosedived 99.9 per cent year-on-year in terms of value. Just 50 tonnes, valued at $2.84 million against $3.87 billion a year ago, were brought into the country.

In May, the yellow metal shipments into India dived 99 per cent to 1.4 tonnes valued at $76.38 million. In June, though imports increased to 11 tonnes, they were 86 per cent lower than the same period a year ago.

The main factor for gold’s rise in India despite lower demand is the fall in the value of the rupee against the dollar. The rupee, at today’s rate of 74.74 to the greenback, has dropped 7 per cent against the dollar this year.

On top of this, gold imports attract a 12.5 per cent customs duty.

A weak rupee has, naturally, pushed up gold prices. With gold prices forecast to rise globally, further upside in Indian prices is likely.

Though high prices for gold are putting away customers, jewellers are trying to woo them with discounts and offers. But there should be no surprise if gold tops Rs 60,000 per 10 gm before the year-end.

That wouldn't be a cheerful news for rural India, which expects a good Kharif crop harvest following a bumper Rabi harvest, ahead of the festive and marriage seasons set to follow over the next few months.

M.R. Subramani is Executive Editor, Swarajya. He tweets @mrsubramani

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