In recent news, India witnessed a remarkable increase in gold prices, crossing the Rs. 50,000 per 10 grams mark for the first time in nine years. This gold price fluctuation is primarily dependent on international pricing trends. As the second-largest consumer of gold worldwide, trailing only behind China, these shifts impact the Indian market significantly.
Factors Behind the Gold Price Rise
The COVID-19 pandemic has thrown global economies into uncertainty, resulting in a weakened dollar and low-interest rates. These factors, coupled with stimulus programs, have amplified the demand for gold. Additionally, escalating tensions between the USA and China and rising virus cases worldwide are contributing to the surge in gold prices.
Gold as Safe Haven
Investors often opt for gold as their preferred investment during fluctuations in global markets, real estate, and bonds. Gold is perceived as a safe haven for funds due to its liquidity and absence of default risk. In times of uncertainty, the precious metal’s scarcity has historically proven to preserve its value over time. Unlike fiat money (paper currency), which can be printed abundantly to uphold monetary policy, the supply growth of gold remains relatively constant.
Gold in Indian Traditions and Economy
Gold plays a significant role in Indian wedding ceremonies and cultural traditions, doubling up as a hedge against inflation. As various global economies contemplate providing stimulus to boost growth, this could potentially lead to an increase in inflation, further enhancing gold’s attractiveness as an investment.
Return on Gold: A Historical View
Over time, gold has consistently generated positive long-term returns. Post the collapse of the Bretton Woods System and the end of the gold standard in 1973, gold prices have risen by an average of 14.1% per annum. In stark contrast to the Bombay Stock Exchange’s benchmark index Sensex’s 0.41% loss, gold prices have soared nearly 40% in the past year.
A Snapshot of India’s Gold Market
Estimations by the World Gold Council (WGC) indicate that Indian households may possess around 24,000-25,000 tonnes of gold. Additionally, various temples across the country hold significant gold holdings. In the financial year 2019-20, the Reserve Bank of India added 40.45 tonnes of gold to its reserves, taking its total holdings to 653.01 tonnes, a crucial part of RBI’s forex reserves.
Although India’s demand for gold dropped from 760.4 tonnes in 2018 to 690.4 tonnes in 2019, and further in 2020 due to pandemic-induced lockdowns, the allure of gold persists. The country sees an estimated inflow of 120-200 tonnes of smuggled gold every year.
