The gold rate in India rose to its highest level in a month today. What is causing the price increase?
The gold rate in India rose to its highest level in a month today. What is causing the price increase?
Following encouraging global indications, gold rate and silver prices increased today in Indian markets. Gold futures on the MCX were up 0.4% to a price per 10 grams that was more than a month high. Silver futures increased 1.2% to 61,525 per kilogram. In global markets, gold’s recovery has resumed today, helped by a decline in US Treasury rates, although gains have been restrained. Gold’s spot price increased 0.2% to $1,719.19 per ounce. The US dollar’s stability also benefited the precious metal. Since gold doesn’t pay interest, lower rates reduce the opportunity cost of owning it. However, spot silver decreased by 0.3% to $20.64 for an ounce.
US nonfarm payroll data that is coming on Friday will be closely watched by gold speculators. The Labor Department’s report on the job situation for September will be eagerly watched by the markets on Friday. Thoughts of buying precious metals as a haven are encouraged by the strength of the world oil market and the geopolitical tensions between Russia and Ukraine. Support for gold lies between $1712 and 1698, while opposition lies between 1740 and 751.
Support for silver lies between $20.48 and $20.20; opposition is between $20.95 and $20.10. Support and resistance for gold in rupees are located at 51,420 and 51,240 and 51,880 and 52,050, respectively. Rahul Kalantri, VP of Commodities, Mehta Equities Ltd., stated that silver has support at 60,150-59,440 and resistance at 61,480-62,110.
Despite rising interest rates, the US economy appeared to be fundamentally strong on Wednesday, according to newly released data. Private companies boosted hiring last month, according to the ADP National Employment Report, while the Institute for Supply Management’s (ISM) non-manufacturing PMI index came in marginally above forecasts.
On Wednesday, the largest gold-backed exchange-traded fund in the world, SPDR Gold Trust, saw an increase in holdings of 0.18% to 946.34 tonnes.
Investors should exercise caution ahead of this week’s US employment report since better-than-expected figures may give the Fed greater leeway to continue tightening, which would raise bond rates. In a letter, Kotak Securities predicted that the price of gold will fluctuate sideways and upward.
In London, among other places, the price of Brent crude rose by 20 cents a barrel to $93.57. It increased by $1.57 the day before when the OPEC+ coalition decided to implement the largest output reduction since 2020. Following Russia’s war on Ukraine in February, the price of oil soared to above $110 per barrel but has since dropped.
What aspects affect the price of gold in India?
It is quite rare to find someone who is uninformed of the intrinsic value of gold, which goes beyond its usage as jewellery or for auspicious purposes to include its ability to provide significant returns, especially during challenging economic times. Let’s begin with a few basic yet important statistics and facts. One of the biggest markets for gold in India. Over 25% of the annual physical demand for gold in the world comes from India. Therefore, it is even more crucial to understand what influences gold prices in India.
- Inflation and gold prices
Let’s start with the link between gold prices and inflation, which is often stated as “gold functions as a hedge against inflation.” Simply explained, inflation is a decline in the buying power of money that is represented by an overall rise in the prices of goods and services in an economy. When inflation rates grow, the value of the currency declines.
In general, inflation and fluctuations in the price of gold tend to be directly inversely correlated, which simply implies that greater levels of inflation will most likely result in high prices of gold because the value of the currency will be dropping. This may be explained by the fact that during inflationary times, individuals seek to keep money in the form of gold on the theory that gold’s value would remain steady over time compared to that of currency, making it the best inflation hedge.
- Interest rate effects on gold prices
Interest rates and gold prices tend to be inversely related. This could be because people find it difficult to generate sufficient returns on their accounts when interest rates are low and believe that investing in gold would yield higher returns. As a result, demand for gold rises, and gold’s price follows suit. Contrarily, people typically sell their gold and put their money in deposits as interest rates rise in order to enhance their income. As a result, demand for gold decreases, and as a result, the price of gold rises. However, historically, there hasn’t been a connection between gold prices and interest rates.
- Indian jewellery market’s effect on gold prices
Due to the cultural beliefs of the Indian population, it is impossible to ignore the influence of the Indian jewellery industry on gold prices, therefore let’s attempt to understand how they are related.
We are all aware of the importance of gold in Indian families, especially during the holiday and wedding seasons. Additionally, prices rise throughout the holiday season as a result of increased consumer demand for gold. The World Gold Council (WGC) said that Indian families had amassed over 25,000 tonnes of gold altogether, making India the country with the highest gold holdings globally. This is important information to remember.
- Monsoon and Gold Prices
Let’s move on to the next fascinating aspect that affects gold prices: a good monsoon season. According to statistics from sources, India uses between 700–800 metric tonnes of gold each year, with the rural sector of the country accounting for over 60% of the country’s consumption of gold jewellery. Due to these realities, rural gold demand plays a significant role in shaping both gold prices and the total demand for gold in India.
The association between excellent monsoon rains and gold prices is because favourable monsoon conditions typically result in good agricultural output. This leads farmers to invest a percentage of their income in gold purchases for a variety of reasons, including as a safety net in case crops fail in the following harvesting seasons.
- Effects of exchange rate changes and import taxes on gold prices
In addition to these elements, one should think about how import taxes and currency changes may affect gold prices. Any changes in the USD or INR may have an effect on gold prices in India because gold is sold in USD on international markets. As an illustration, the value of gold is likely to rise in INR if the INR were to decrease versus the USD. Given that it is one of the biggest users of gold and that imports account for 89% of its consumption, India imports a lot of gold as well. As a result, import tax is a significant factor in influencing gold prices in India.
- Geopolitical issues and uncertain futures’ effects on gold prices
Investor demand for gold tends to rise during political unrest, geopolitical unrest, or general economic downturn because gold is seen as a reasonably secure investment by investors. Gold is a perfect asset to park money in during such periods since other asset classes typically see a decline in value during tumultuous times, which is typically not the case with gold.
- Gold reserves’ effect on gold prices
Finally, let’s talk about how government gold holdings affect gold prices in India. Along with holding money, the Reserve Bank of India and the central banks of many other nations also have gold reserves. As a result, whenever such reserves start accumulating more gold, the price of gold tends to increase due to the consequent increase in demand for gold.
What Impact Do Changes In The Gold Rate Have On The Indian Economy?
Indians have a gold addiction. Gold is a crucial component of the equation whether it is used for investments, presents, paying homage to deities, marriages, or any other celebratory event. Indians have a gold addiction. Whether it is utilized for investments, gifts, adorning idols, marriages, or any other festive occasion, gold is an essential part of the equation.
Gold has intrinsic worth in terms of purity and riches and is seen as a sign of success and good fortune. According to reports, Indians in India own more gold than any other group of people on the planet. It is true that Indians frequently acquire and retain gold, despite the fact that there are several reasons for this.
Due to its voracious need for gold, India imported a staggering $61,409 million worth of gold in 2012–13, accounting for a stunning 12.50% of all of its imports. India imported 26.12% (1,079 tonnes) of the 4,130 tonnes of gold produced worldwide in 2012, accounting for one-fourth of the total amount.
For a nation to maintain a favourable balance and increase its per-capita income, its exports must exceed its imports. As of December 2012, our current account deficit was 6.7% (experts, analysts, and the RBI estimate we can only maintain a deficit of up to 2.5% at any given time). The RBI has put in place an 80:20 mechanism to combat this, whereby 80% of imports are utilised to meet local demand and 20% must be re-exported after value adds, such as converting gold bricks into jewellery.
In 2011–12, banks were the source of almost 56% of all the gold imports, which were then sold to the general public as coins. When the current account deficit grew in 2013, the Finance Ministry forbade banks from selling gold coins (CAD).
Due to its non-productive nature, gold has an impact on the Indian economy. The productive potential of the economy is not significantly increased by gold as a commodity. The majority of the gold bought in India is either turned into jewellery or stored away in safes and vaults. Those that hold gold are either waiting for it to rise in value so they may start earning money and returns on their investments, or they choose to keep it even after it does so to enhance their wealth.
India uses gold as a tool to combat inflation, and having an object with intrinsic worth due to its scarcity is a useful approach to balance off changes in fiat money. In India, gold is a common way to save money since it gives one a sense of security and comfort about their financial situation. Psychologists refer to this as the “exposure effect.” Keeping physical gold in the form of a genuine asset is favoured for the simple reason that it can be handled, felt, and kept secure in a box.
This is in contrast to holding financial gold, gold in the form of ETFs, and gold in the form of E-gold, all of which are wise investments. For Indians, the experience of holding actual gold is significant. This is another factor in why we regard gold so highly; it is safer in terms of real worth than the Rupee and increases over time.
To counter the rise in gold imports, the government is also hiking its import tariff. The import tariff was increased five times, from 1% to 10%, between January 2012 and January 2013. Sri Lanka has also imitated this action to stop the smuggling of gold.
Only the first two of India’s three main imports—crude oil, cooking oil, and gold—are essential commodities. The government may take a few simple steps to lessen the harm caused by the enormous imports of gold. Reducing imports of non-essential goods like eyeglasses (Rs. 336 crores), dolls (Rs. 431 crores), cosmetics (Rs. 2,713 crores), and other items are among them. By empowering the jobless people to produce these goods themselves, we can drastically reduce our reliance on imports, tip the balance of world commerce in our favour, generate jobs, and maybe even increase exports.
People buy gold without thinking about macroeconomic consequences or damage to the country’s economy, but they are unable to stop because no other investment choice gives the same benefits as gold. A sense of trust in the value of gold is also natural since it will always have some value even if all other assets, like bank accounts and fiat currencies, are arbitrarily devalued or inflated.
Even simple actions like investing in gold have an impact on the economy since at least a million other Indians are doing the same thing elsewhere in the country on the same day. Think about investing in different platforms and vehicles that will provide you with good returns on your money; you could just be saving the economy in the process.
edited and proofread by nikita sharma
