Why is there an Upward Rally in Gold Prices?

Sub : Eco

Sec: External sector

Geopolitical Tensions and Economic Uncertainty:
- Gold prices surged to an all-time high, due to heightened geopolitical tensions and global economic instability.
- In India, gold mirrored this trend, marking a 40% increase from last year’s price.
Inverse Relationship with Interest Rates:
- Lower interest rates and a weaker U.S. dollar make gold more attractive, driving up demand as it provides a safety net amidst low yields on other assets.
- While gold doesn’t yield returns, it gains appeal as a store of value when interest rates fall, prompting investors to seek the “safe haven” of gold.
Global Demand for Safe-Haven Assets:
- Amid global uncertainties, investors are drawn to gold due to its low correlation with other asset classes and ability to hedge against inflation and currency fluctuations.

Why is Gold Considered a Safety Cushion by Central Banks?

Hedge Against Global Uncertainties:
- Central banks accumulate gold to mitigate risks from economic and political crises, benefiting from its stability and long-term value.
- August Net Purchases: According to the World Gold Council (WGC), central banks acquired 8 tonnes of gold in August, with Poland, Turkey, and India as major buyers.
Diversification of Foreign Exchange Reserves:
- Holding gold diversifies central banks’ reserves, reducing dependence on volatile currency values and other assets that are more impacted by economic downturns.

When Does Demand for Gold Peak in India?

Festive and Wedding Seasons:
- High Demand Period: Gold demand typically spikes in the second half of the year, coinciding with Indian festivals like Diwali and the wedding season.
- Buffer Period: The period from mid-September to early October is often a lull, as it’s considered inauspicious for purchases according to the Hindu calendar.
Price Impact:
- Gold prices generally increase during these peak periods, reflecting heightened demand and strong cultural significance tied to the yellow metal.

Why Does the World Gold Council Expect Increased Demand for Gold from Rural Areas?

Favourable Monsoon and Crop Production:
- Good monsoon seasons and higher crop sowing are expected to enhance rural incomes, thereby boosting the purchasing power for gold in rural India.
- Rural Spending Power: Strong harvests and improved incomes can lead to higher gold consumption, especially in rural and Tier II and III cities.
Impact of Reduced Import Duties:
- The reduction in gold import duties in July has already boosted domestic demand, making gold more accessible and attractive to Indian buyers.

What Factors Determine Gold Prices?

Supply and Demand Dynamics:
- Finite Resource: Gold’s limited availability adds a scarcity factor to its valuation, with the long gestation period from mining to production making it less responsive to short-term market changes.
Dollar Value and Interest Rates:
- Gold prices are globally referenced in U.S. dollars; hence, a weaker dollar often leads to higher demand for gold as a hedge against currency depreciation.
- An inverse relationship with interest rates also influences prices; lower rates make non-yielding assets like gold more appealing.
Investor Appetite:
- Investor sentiment compared to other assets (such as bonds) plays a role, especially during periods of geopolitical unrest or financial instability, where gold acts as a store of value.