Gold prices have surged dramatically in recent years, soaring from Rs 31,000 per 10 grams in early 2018 to over Rs 73,000 in 2024. This has sparked debates within financial circles about its sustainability and whether it signals an impending bubble. With a 69 per cent increase in rupee terms since the onset of the COVID-19 pandemic in March 2020 and a further 9 per cent rise since the start of 2024, gold’s appeal as a safe haven asset and hedge against inflation has never been more evident. As investors navigate volatile markets and economic uncertainties, understanding the complex factors driving this surge is crucial for making informed decisions. The Pioneer’s Tanisha Saxena delves into the details of this remarkable surge in gold prices, analysing its trajectory and the factors fueling its ascent.
In the volatile world of finance, gold is among the few assets that command much attention. Its timeless allure as a store of value and as a hedge against economic uncertainty has propelled it to the forefront of global markets. In recent times, gold prices have been on a relentless upward trajectory, defying conventional wisdom and reaching unprecedented highs.
A peek at the history of gold
prices in India
The historical trajectory of gold prices in India is one of consistent upward movement, punctuated by periodic fluctuations. Despite economic challenges and currency devaluation, gold has maintained its status as a dependable investment option. Over the past decade, gold rates have witnessed a remarkable doubling, showcasing its resilience amidst volatile financial landscapes. This upward trend is fueled by a multitude of factors, such as geopolitical uncertainties, inflationary pressures, currency devaluations, and robust demand from both investors and industries.
Gold’s intrinsic value as a crisis hedge and its role in safeguarding wealth make it a compelling choice, particularly during economic downturns. A nuanced understanding of the intricacies of gold price history will empower investors to make informed decisions, while recognising gold as a stable and multi-faceted asset class.
University of Hyderabad economics professor G. Vijay highlights some of the historical events that have impacted gold prices:
1. Liberalization of the Indian economy (1991): The economic reforms in 1991 led to increased disposable income, prompting higher gold demand.
2. Global financial crisis (2008): Investors turned to gold as a safe haven during the economic uncertainty, leading to a surge in gold prices worldwide, including India.
3. Demonetization (2016): The Indian government’s decision to demonetize high-denomination currency notes led to a surge in gold purchases as people sought to convert their cash into assets perceived as more stable.
4. Goods and Services Tax (GST) implementation (2017): The introduction of GST on gold caused some short-term disruptions, but eventually led to the formalisation of the gold market and a reduction of black market activities.
5. 2014 Ukraine crisis: The crisis escalated tensions between Russia and the West, leading to uncertainty in financial markets and increased demand for safe-haven assets like gold. As a result, gold prices surged, affecting prices in India and other countries as well. Investors sought to hedge against geopolitical risks, contributing to the rise in gold prices during that period.
6. COVID-19 pandemic (2020): Economic uncertainty and market volatility caused by the pandemic led to a surge in gold prices globally, including India, as investors sought safe-haven assets.
Unusual market dynamics
Traditionally, gold prices have exhibited an inverse relationship with equity markets, rising during times of economic turmoil and falling when stocks soar. However, presently both gold and equities are scaling new peaks simultaneously. This unusual phenomenon underscores the unique blend of factors fueling the gold price rally.
Amidst geopolitical tensions, trade disputes, and the continuing ramifications of the COVID-19 pandemic, global economic uncertainty has become a prevailing theme. In such tumultuous times, investors seek refuge in safe-haven assets like gold, driving up demand and consequently, pushing prices to new heights. This surge in demand for gold as a store of value highlights investors’ concerns regarding the stability of traditional financial markets and the need for portfolio diversification to mitigate risks associated with economic volatility.
Another aspect is that the ongoing inverse correlation between gold and the US Dollar Index (DXY) has once again come into prominence. As the US dollar depreciates against other major currencies, gold emerges as a more appealing investment option due to its intrinsic value and historical role as a hedge against currency devaluation. Consequently, heightened investor interest in gold has lead to increased buying activity, resulting in upward pressure on prices. This phenomenon underscores the significance of currency dynamics in shaping gold price movements and investor behavior in global financial markets.
“Speculation surrounding potential interest rate cuts by the Federal Reserve has significantly influenced the recent rally in gold prices. Historically, gold prices have exhibited a positive correlation with low-interest-rate environments, as lower rates diminish the opportunity cost of holding non-yielding assets like gold. Consequently, heightened expectations of monetary easing policies by central banks have fueled investor optimism regarding gold’s future performance, leading to increased investment inflows and a subsequent uptrend in prices,” says Vijay Srinivas, a chartered accountant. This underscores the intricate interplay between monetary policy decisions, market sentiment, and gold price dynamics in the contemporary financial landscape.
China’s gold appetite
China’s burgeoning appetite for gold has emerged as a key driver behind the recent surge in prices. With that country’s central bank actively augmenting its gold reserves as part of its strategic diversification efforts, and a growing trend of gold buying among young Chinese consumers, demand for the precious metal has soared to unprecedented levels. This robust demand from the world’s largest consumer of gold underscores the enduring allure of gold as a tangible asset and a store of wealth, contributing significantly to the upward trajectory of gold prices globally.
“China’s increased gold purchases in 2023 reflect a response to economic uncertainty, as evidenced by fluctuating GDP growth and consumer caution. Gold’s outperformance compared to other assets, driven by geopolitical risks and central bank purchases, likely incentivized China’s acquisitions. Rising demand for gold, supported by innovations in jewelry manufacturing and global economic and geopolitical uncertainties, further contributed to China’s decision to bolster its gold reserves,” opines sociologist Asima Jena.
Impact on various sectors
Naresh Kumar Akula, business head at PMJ Jewels, Madhapur, Hyderabad, explains, “As gold prices rise, consumers are finding a renewed sense of security in investing in this precious metal. Unlike the complexities of real estate or stock markets, gold investment is perceived as more straightforward and accessible to Indian families. This increased accessibility has led to a surge in sales, further bolstered by the upward trajectory of gold prices. While concrete data may be lacking, anecdotal evidence suggests that consumers are increasingly viewing gold purchases as not just adornments but also as investments. Moreover, the younger generation, aided by user-friendly mobile apps, is embracing gold investment through recurring plans offered by jewellers, signaling a shift towards financial prudence and wealth accumulation among Indian households. This trend reflects a broader societal shift where opportunities for wealth creation are becoming more accessible, potentially allowing individuals to transition from lower to higher economic strata within a single generation.”
The surge in gold prices can serve as a barometer of inflation expectations and overall market sentiment. It may also influence central bank policies and monetary decisions, with implications for interest rates and economic growth trajectories.
“Central banks holding gold reserves stand to benefit from the appreciation of their assets as gold prices surge. This can have implications for reserve management strategies and monetary policy formulation. Gold-producing countries may see increased export earnings and government revenue as gold prices soar. However, higher import bills for gold can exacerbate trade imbalances and put pressure on foreign exchange reserves,” asserts financial analyst Mudit Khanna.
As per a research report by ICICI Bank, “India stands prominently as one of the world’s largest importers of gold, a distinction that bears significant economic implications. When gold prices surge, the value of gold imports escalates, precipitating a widening of the current account deficit. This burgeoning deficit exerts formidable pressure on the nation’s balance of payments, potentially catalyzing the depreciation of the domestic currency. Moreover, the escalating import bill for gold inexorably impacts India’s trade balance, straining foreign exchange reserves and casting shadows of uncertainty over the economy’s stability.”
Concurrently, the Indian government strategically leverages import duties on gold to not only regulate its influx but also bolster revenue streams. The uptick in gold prices inevitably translates into higher import values, consequently amplifying government earnings through augmented import duties. The report emphasises, “This fiscal maneuver not only aids in managing the influx of gold but also provides a vital infusion of revenue, contributing to the government’s financial objectives amidst dynamic economic landscapes. In the dynamic landscape of financial markets, the fluctuation of commodity prices, particularly that of gold, holds a significant sway over the lending ecosystem. As gold prices ascend, their impact reverberates throughout the lending system, influencing collateral valuation, risk assessment practices, interest rate dynamics, and the overall demand for loans.” This interconnected relationship between rising gold prices and lending institutions underscores the importance of understanding how shifts in commodity markets can shape lending strategies and risk management approaches.
“A shift in the market price of gold can directly influence the loan-to-value ratio, which in most cases results in a significant change in the borrowing capacity. As the market price of gold increases, so does the potential borrowing power against the gold owned by the borrower. Also, due to the price hike, the demand for balance transfers with Gold Loan NBFCs has seen an increased trend over the last 6-8 months,” shares Rahul Kalyani, Senior Vice President-Partnerships, LoanTap.
And, when it comes to investment, Ashish Aggarwal, founder, ACube Ventures, says, “Given the recent surge in gold prices and the current landscape of potential interest rate cuts and geopolitical tensions, investors should take a moment to reassess their portfolios. Diversification is key, especially during periods of market volatility. Gold has historically served as a hedge against such fluctuations, offering stability when other assets might falter. The appeal of gold as a safe haven asset has heightened, with investors increasingly turning to it as a reliable store of value during times of uncertainty. This trend is likely to continue as long as economic indicators remain uncertain and geopolitical risks persist. Including gold in your investment strategy could offer a buffer against market instability. However, it is important for investors to proceed with caution and closely monitor economic indicators and geopolitical events that could influence gold prices.”
While gold can be a valuable addition to your investment portfolio, it is essential to stay informed and be prepared to adjust your strategy as the market evolves. Aggarwal adds, “Investors should always seek guidance from financial advisors before making decisions about gold or other precious metals, as understanding your risk tolerance and investment goals is crucial when considering exposure to gold. A financial advisor can help navigate the complexities of the gold market and develop a strategy that aligns with your financial objectives, ensuring a balanced and resilient portfolio.”
In sum, the surge in gold prices defies simple explanation and reflects the complex interplay of global economic forces, investor sentiment, and market dynamics. While the reasons behind the rally are multifaceted, the implications extend far beyond financial markets, touching various sectors and economies worldwide. As investors navigate the uncertainties of the current landscape, the enduring appeal of gold as a timeless asset remains undiminished.
