Gold prices in India depend on the international price trends, measuring factors such as US dollar index and US interest rates. Yesterday, on Friday, US Federal Reserve (Fed) Chair Jerome Powell said that they might start to reduce the monthly bond purchases programme, later this year, but will not rush to hike the interest rates now. As gold is traded against the US dollar, this announcement is going to leave significant impacts on the yellow metal's prices. When the US Fed will start tapering later this year, it is expected that the interest rate might increase after the tapering, that is in early 2022. Hence, the end of 2021 is no more anticipating a stiff rise in gold rates, as expected before.
Why the prices might drop?
Spot gold prices till Aug 27, in the international market, was standing at a $1816.80/oz level and COMEX price was quoted at a $1,819.5s range. In India, 22 carat gold was last quoted at Rs. 4662 per gram. As the Fed Chair Powell announced the possible tapering time, the small rally in gold could end. A similar trend can be found with silver. Spot gold and silver prices might perform moderately, but future rates will be affected. With an interest rate hike, the government bond yield will rise and investors will focus on the US dollar, in addition to government bonds. This will eventually shift their concentration from gold, dragging the precious metal's prices down, globally.
Fed's quantitative easing (QE) policy
Due to the pandemic, the US Fed earlier was maintaining a position of quantitative easing (QE) with a US$120 billion-a-month bond-buying programme, to flood the economy with liquidity. But now, as the labour market and housing market data show the economy is gaining pace, which is giving the Fed strength to taper the asset-buying programme. The country's labour market added 943,000 jobs in July, while the unemployment rate fell to 5.4%. July, month-on-month housing sales data showed positive results, above market expectations. Now, the Fed is ready to focus on its currency index to grow, which will drop down gold rates.
India is one of the largest consumers of gold, globally, and the RBI has purchased a record amount of gold in the recent past to store in its reserve. For the common people, to buy gold, they have to pay the basic gold prices as the Indian Bullion Jewellers Association (IBJA) fixes daily, considering the global rates, along with additional GST. Indians have to pay import duty and cess as gold is mostly imported from foreign markets. As the prices are expected to fall in the international, this will drag down gold prices in India giving more scope to common people to buy the yellow metal. If the gold rates are falling now, an investor who is planning to stay put in the long term, should not worry. Gold always performs well in the long term. When the gold rates are down in the market, it is recommended to invest. Also, a 15-20% gold investment helps an investor to diversify the portfolio, thereby mitigating market risks and keeping a hedge against inflation.