Gold has been considered a symbol of purity, value, royalty, and especially roles that combine these properties. There has been a drastic increase in gold prices since 2010, wherein rates have risen 900% over the last 10 years. Let's take a look at how the yellow meta prices have jumped so far.
Traditionally, gold has been a safe investment option in India, but its role has changed over time. Gold is now traded and predicted as a commodity. Gold has entered the secular bull market as prices are rising. Gold, unlike any other commodity, has always provided significant returns to its investors. Buying gold is one of the preferred means of investing. It's better than fixed deposits, stock markets, or mutual funds, etc., as a hedge.
In India, gold has always had its relevance as it was used at weddings and festivals as a sign of culture. Over the years, investing in gold has become an ideal hedge for volatile markets, mainly due to the metal's scarcity.
In recent months, gold prices have continued to rise. And after the March crash due to the COVID-19 lockdown, they managed to break through the 50,000 rupees mark in July 2020.
What influences gold price in India:
The decrease in gold supply:
Gold mining has been declining for several years. There is a sharp increase in the price of gold and while the quantity mined has been volatile, rather on a lower side. Gold behaves less like a commodity and more like long-term assets such as stocks or bonds. This characteristic makes expectations particularly important because, as the stock market, gold prices are forward-looking and the current price is highly dependent on future demand and supply. As is the case with any commodity traded, the demand for and supply of gold plays an important role in determining its price. Unlike petroleum, gold is not a consumable product. However, All the precious metal that has ever been mined is still available in the world. Also, each year the amount of gold mined is not very high. And so, if the demand for gold increases, the price increases because the supply is relatively scarce.
Inflation and Interest rate
When inflation rates increase, the value of money decreases. In addition, most other means of investment fail to produce returns above inflation. Therefore, most of the people start investing in gold. Even though the high inflation rates last for an extended period, gold acts as a perfect hedge as it is unaffected by fluctuations in the value of the currency.
The Gold prices have an opposite relationship with interest rates. When interest rates go down, people don't get good returns on their deposits. Hence, they tend to break their deposits and buy gold instead, which leads to an increase in demand and therefore the price. On the other hand, when interest rates rise, people sell their gold and invest in deposits to earn high interest, resulting in lower demand and lower price.
In international markets, gold is traded in USD. On import, USD is converted to INR. Thus, any fluctuation in the USD or INR can affect the import price of gold and therefore the selling price. Gold has an inverse relationship with the dollar, recently the United States in great financial turmoil, the dollar has weakened against many currencies, so gold prices are expected to increase. The Dollar will trade against a basket of major currencies around the world. But now the United States on the financial depression, gold has been replaced as a haven for investment.
Demand from the Central Bank:
With the dollar losing value, the Reserve Bank of India and the central banks of most developed countries have started to increase their share of gold in storage to avoid an excess. Since the onset of the global financial crisis, there seems to be a noticeable boom in gold prices.
The Indian government holds gold reserves. Depending on their policies, you can buy or sell gold through the Reserve Bank of India (RBI).The price of gold can be impacted depending on whether it buys or sells more.
Weak financial markets:
Gold is negatively correlated with stocks, bonds and real estate. During any financial or non-financial crisis, investors like to invest in gold. In countries like India, which depend entirely on gold imports, are price takers, relying on London gold price fixes, causing the gold price to exogenously impact demand gold physics. The domestic price of gold is determined by the world price of gold, the exchange rate, the transaction cost, import duties and certain arbitrage elements.
Indian jewelry market:
In India, gold jewelry is an integral part of most religious festivals and weddings. That is why, during festivals and wedding seasons, the demand for gold increases, raising its price. In India, the prices of the yellowmetal decided by some local jewellery sops association based on international market.
Has the demand for gold been good in the last few years etc etc.
According to the World Gold Council (WGC), demand for the precious metal reduced in India so far during the Calender Year 2020(CY20) stands at 252 tonnes, compared to same period of Calender Year 2019(CY19) stnads at 496 tonnes. Even if the October to December 2019 (Q4CY19) demand of 194 tonnes is added to the Calender Year(CY20) demand so far, the total demand for CY20 will be less than the total CY19 demand of 696 tonnes.
As for India, demand for gold at Q3CY20 was 86.6 tonnes, down 30% from the same period in 2019 to 123.9 tonnes. The value of gold demand stood at Rs 39,510 crore during the period under review, down 4% from Rs 41,300 crore in Q3-2019, according to WGC data.
A sense of cautious optimism has returned among traders as society is gradually learning to live with Covid-19 pandamic. However, as we are still under the impact of the pandemic and the fear of a second wave of infections without a clear view of many variables on consumer behavior, price volatility or the duration of the disruptions, we will not be unable to quantify the impact on full-year gold demand in India, except to say demand could be low over several years.