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Is The Rally In Gold Overdone?
In India, gold demand has fallen dramatically in the last quarter. In fact, demand for the precious metal is down by 12 per cent to 116 tonnes, according to data provided by the World Gold Council.
As prices rally, demand for gold in India tends to fall. It is important to remember that Indians are big consumers of gold and not sellers. Seldom would you see individuals selling gold in India.
Are elevated gold prices here to stay?
In the month of December, 6-months ago, 22-karat gold price in Mumbai was trading around Rs 28,880. It has now rallied to Rs 31,000 for 22-karats, which is near 8 per cent gains. One of the biggest reasons for the gains is the sharp fall of the rupee, against the dollar. It is important to remember that India imports gold and a drop in the rupee makes gold costlier.
The one big factor that could reduce prices of gold in the global markets, is a faster pace of hike in interest rates across the US. When interest rates in the US rise quickly, investors would move money away from gold into fixed income bearing securities. However, at the moment, we would expect interest rates to move gradually as consumer inflation in the US is benign.
The other factor that can make gold cheaper is if the rupee gets stronger against the dollar. This is something that is even more difficult to happen. The rupee is likely to weaken on sustained demand for crude oil, which has been rallying over the last few weeks.
Inflows from Foreign Portfolio Investors too has not been very supportive to the Indian rupee. This leaves one with the prospects of a weak rupee and hence elevated gold prices.
The one reason why gold may fall is on account of the demand, which has remained very subdued. In fact, if prices remain elevated for longer which is likely to be the case, demand may continue to fall. At the moment, it seems that elevated prices of gold are very much here to stay.
Investors or consumers, who are looking to invest for the long-term, may invest. If you have been patiently waiting to buy when prices are lower, it is difficult to suggest, how long you may have to wait.
Check gold rates in all Indian cities here
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