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Falling Gold Rates, Is It A Good Hedge Against Inflation Any More?


Gold prices in India have dropped below from its historical highs; 22 carat gold of 10 grams is quoted at Rs. 46,070 on September, 12. The prices might have increased far-reaching than 2019's levels - when it was around Rs. 35,300, but in reality, in 2021 the prices have dropped pretty good from 2020's levels. If the prices are measured from this year's values, it will show a drastic fall. On January 5, 2021, the 22 carat gold of 10 grams was quoted at Rs. 50,320, hence, in the last 9 months gold has fallen around Rs. 4,000 per 10 grams. So, here the question arises about the yellow metal, being a hedge against inflation.

Falling Gold Rates, Is It A Good Hedge Against Inflation Any More?

Yearly gold rates change in India

YearIndian gold rates performance (annual change)


Rising inflation

The gold market has been a volatile one like other commodities, but the inflation rate in India on the other hand has stayed steady to hike. CPI inflation was more than 6%, only in the last month, the figures eased a bit. But the delta variant Covid virus, and expectations of 3rd wave pandemic in the country are not allowing economists to be quite optimistic. Buyers who are not in a mood to invest in gold for returns, but want to use it as jewellery, might be a good time for them to buy, but traditional investors are slightly worried about the upcoming 2 quarters' rates.

The US too is struggling with its rising inflation rates. Indian gold rates are determined as global gold prices and traded against the US dollar as it is a dollar-dominated asset class. Hence, US Federal Reserve's monetary policies are tracked in India to anticipate gold rates. US Fed officials are now thinking that the inflation is transitory, but according to Adrian Day, President of Adrian Day Asset Management, "that narrative is not reflective of reality." Fed Chairman Powell is dovish about the economy because of a muted employment data, and not ready to hike interest rates soon; no strong declaration regarding tapering has also been announced. But some other officials are in favor of tapering, if that happens, gold prices will be dragged down in the international market, thus reflecting the same trend in the Indian markets. So, will gold remain as a hedge?


What else?

Anticipating the inflation and gold price-relation in the present market situation, Adrian Day recommends hard assets, as well as stocks, along with gold as a hedge against inflation, as he is concerned about the growing inflation rate. Day stated, "Equities are an inflation hedge. People's own businesses can be an inflation hedge. I think gold is a good inflation hedge on a risk-reward basis because I don't think there's a lot of risk in gold. Silver has historically been a better inflation hedge, but right now I think it would be a better inflation hedge."

He added, "Importantly, gold is not always the best inflation hedge, but it performs well during deflation." This is the significant reason, as, during the peak hours of the pandemic in 2020, the gold rates went all-time high, giving hope to commodity investors. Only in this year, when the economy started to ease, the situation started to change slowly.

Keeping in mind the backdrop in India, investors should remember that RBI, the central bank of India has increased its foreign exchange reserve to historical highs, and the gold reserves improved massively. Gold reserves stood at 705.6 tonnes till the end of June 2021 for the first time and still increasing. It indicates that the central bank is keeping hope on the precious metal. However, gold as an asset is one of the best options for long-term returns. But if the investor is having a better risk appetite and a zeal for short-term returns, there will be an equity market to trade on companys' stocks.

In India, Sensex (at 58,305.07 till September 9) and Nifty (at 17,369.25 till September 9) too are at an all-time high now and performing at a rattling pace, driven by domestic investors due to multiple reasons - like increasing economic activities and better vaccination drives. On the other hand, real estate prices are decently subdued now due to pandemic and lower registration charges, but the value will escalate in the next 1 year or 2. So, this segment can also be explored by big investors expecting good outcomes.

However, the global gold rates trend in the upcoming week will show how the investors and market insiders are looking at the yellow metal in the present situation. Gold will certainly remain a hedge, but on a long-term basis; for a short-term basis the other assets should not be left aside, and the stock market when it is booming.

Story first published: Sunday, September 12, 2021, 9:54 [IST]
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