The Gold prices in India continued their rally this week and hit an all-time high of Rs.51,500 per 10 gms. This is the first time that gold prices have crossed the barrier of Rs.51000. Gold prices have surged over 30% so far this year.
This is surprising considering that the demand for gold in India has virtually collapsed in India (and China) amidst the pandemic. Consider this- India imports almost all the gold it requires. In April and May 2020, the gold imports fell by 99 %.
India and China are the two largest buyers of gold in the world. And, the demand from these countries has plunged.
Before looking into the reasons for the price rise, we have to understand that three factors affect gold prices in India-
- International prices
- The dollar-rupee exchange rate
- Taxes and profit margin
In global markets, gold crossed the $1,900 per ounce ceiling on Friday for the first time since 2011.
The gold prices have surged to a new high in international markets due to the following reasons:
- Safe haven: Gold is perceived as a safe haven during times of global crises. It is used as a tool to hedge against inflation and uncertainties. It is also very liquid as compared to other assets. Therefore, western investors have been investing in gold and that has made up for the collapse in demand in India and China. More than 700 metric tonnes of gold have been added to vaults around New York this year, the most in records going back to 1993. ETFs in the US and Europe have been piling up gold- exactly what they did in 2009 on the back of the financial crisis. [You may also read: Financial Crisis 2008 explained]
- Low/ negative real rates: The return from other investments like the Government bonds in the US has declined. It has made gold even more attractive.
- Geopolitical tensions: The trade war between the US and China shows no sign of being resolved. Trump is not happy with the first phase of the trade deal and has ruled out the possibility of the second trade deal. Therefore, concerns over global growth have increased. This fear has led investors to invest in gold, rather than in the equities market. [You may also read: What is the trade war between the US and China?]
- Massive stimulus measures from Government worldwide: Governments all over the world have provided a massive fiscal stimulus to the economy. This easy money has made its way into gold. [You may also read: Modi’s 20 lakh crore economic package]
Besides the international gold prices, the value of Indian rupee has depreciated against the dollar. It has made imports of gold even more expensive.
This rally in gold prices in India despite low demand is not new. It happens after every economic recession.
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