Over the past three months, India, renowned as the world's second-largest importer of gold, has witnessed a downturn in demand, courtesy of the ascent in gold prices.

Since the beginning of 2024, gold prices have risen by 9 percent when measured in Indian rupees. Currently valued at Rs 72,930 per 10 grams, the precious metal has experienced a significant 69 percent increase in rupee value since the onset of the Covid-19 pandemic in March 2020. Comparatively, the Sensex has seen a rise of 43 percent (excluding the brief downturn in March 2020). This contrast underscores why gold is seen as a safeguard against currency devaluation and inflation by Indian households. Its appeal remains unparalleled. Additionally, considering the rupee's depreciation by 12 percent since the pandemic's inception, gold's performance would be even stronger when evaluated in dollar terms.

GOLD = ASSET?

Gold, as a valuable asset, becomes particularly attractive during periods of uncertainty. Over the years, there has been a consistent increase in global investment in precious metals, with gold leading the way. While gold remains the preferred choice for jewelry among Indians, investors also view other forms of gold, such as gold coins, bars, and gold ETFs, as safe havens. Purchasing gold during auspicious Indian festivals like Dhanteras, Akshay Tritiya, and Diwali holds significant cultural importance and is highly esteemed. Additionally, gold holds a prominent position in Indian wedding traditions, with no wedding shopping list considered complete without gold purchases.

One of the key advantages of investing in gold is its ability to serve as a hedge against inflation during economic downturns. Gold prices tend to rise when there is a decline in interest rates, which correlates with the strength of the economy. While gold prices may experience short-term volatility, historically, gold has proven to maintain its value over the long term.

Since 2001, gold has exhibited an impressive annual growth rate of approximately 15%. The turmoil experienced during the 2008-2009 financial crisis underscored gold's role as a haven asset, prompting renewed interest in effective risk management strategies.

The fluctuating landscape of economic growth has compelled even institutional investors to include gold in their portfolios, recognizing its potential for long-term gains. Additionally, gold serves as a diversification tool, offering a hedge against losses during times of stock market volatility.

As a highly liquid asset, gold proves its worth during turbulent economic conditions. It serves as a safeguard against both inflation and currency devaluation. Moreover, gold tends to shine when equities and bonds experience downturns in the stock markets.

In India, a nation with a deep affinity for gold, the metal holds a special place and ranks second globally in terms of consumption. It is valued not only as an investment avenue but also as a luxury item. Over the years, the value of gold has witnessed significant appreciation, cementing its status as one of the safest assets for investment.

THE HISTORICAL TRAJECTORY OF GOLD PRICES IN INDIA

Exploring the trajectory of gold prices in India unveils a compelling narrative of fluctuation and growth over the decades. Understanding this historical context sets the stage for anticipating the future of this luminous metal.

Across the past twenty years, gold has demonstrated an average return of 11.2%, outpacing many other asset classes. However, a closer look reveals periods of stagnation, such as the stretch from 2012 to 2018, characterized by minimal price movement. Yet, following this, a resurgence occurred, marked by consistent upward trends in prices, prompting us to ponder the crucial question ahead.

APRIL 2024 - GOLD RATE

Gold prices reaches its extremity in the month of April 2024 as they continued their decline for the second consecutive day, reaching a low not seen in over two weeks on Tuesday, April 23. The easing concerns regarding heightened tensions in the Middle East led investors to secure profits ahead of significant US economic data releases scheduled for the week. Spot gold dropped by 0.3 percent to $2,318.90 per ounce, marking its lowest level since April 5. The surge in gold prices from March to April propelled it by nearly $400 to reach an unprecedented peak of $2,431.29 on April 12, as reported by Reuters.

Meanwhile, US gold futures experienced a 0.6 percent decline to $2,331.80. Spot silver remained relatively stable at $27.17. Platinum, an auto catalyst metal, saw a slight decrease of 0.5 percent to $912.90, whereas palladium registered a 1.2 percent increase to $1,020.75. In the realm of multi-commodity futures, gold futures observed a decrease of 0.22 percent, settling at ₹71,042 per gram.

FACTORS DETERMINING GOLD PRICES IN INDIA

Central Bank Gold Reserves:

Gold serves as a crucial reserve asset for central banks worldwide, providing stability to national currencies. For example, the Reserve Bank of India (RBI) ensures its banknotes with gold reserves. Nations with abundant gold reserves tend to have stronger currencies, while those heavily reliant on gold imports may experience currency devaluation over time. The recent decision by the Indian government to increase import duties on gold from 10.75% to 15% aims to curb excessive gold imports, which were exacerbating the country’s current account deficit. By making gold purchases costlier, the government seeks to reduce imports and safeguard foreign reserves.

Strength of the U.S. Dollar:

The value of gold often moves inversely to the strength of the U.S. dollar. A stronger dollar tends to suppress gold prices, while a weaker dollar tends to boost them. In India, gold prices are influenced by the exchange rate between the U.S. dollar and the Indian rupee. A depreciating rupee typically leads to higher gold prices.

Demand for Gold:

The price of gold is significantly influenced by demand, which can emanate from various sources:

• Household and Industrial Demand: Household demand primarily stems from purchases of gold jewelry or physical gold forms such as bars and coins. India stands out as one of the world's leading consumers of physical gold. Fluctuations in household demand can impact gold prices, as reduced demand may lead to increased supply, thereby exerting downward pressure on prices. On the other hand, industrial demand arises from sectors like electronics and medical devices, where gold is utilized in manufacturing processes. Changes in industrial demand can also influence gold prices.
  
• Investment Demand: Investment demand for gold is primarily driven by entities such as Exchange-Traded Funds (ETFs), which purchase gold to meet the investment needs of their clients. The Q1 2022 Gold Demand Trends report by Gold.org highlights the substantial inflows into gold ETFs during the quarter, driven by heightened demand for safe-haven assets. The report indicates that gold ETFs witnessed their strongest quarterly inflows since Q3 2020, with holdings increasing significantly, thereby reversing the trend of annual net outflows observed in 2021.
  

Gold Production Capacity:

Gold is a finite resource, and miners must ensure that production meets demand. According to the cited report from Gold.org, mine production reached a record high in the first quarter, dating back to 2000, with a 4% increase. Additionally, there was a notable 15% year-on-year surge to 310 tones in recycled gold, marking the most robust first quarter for gold recycling activity in six years. Generally, when gold supply rises and demand remains stable, its price is likely to decrease.

Interest Rates:

Fluctuations in interest rates significantly impact the price of gold. When interest rates rise, the opportunity cost of holding non-interest-bearing assets like gold increases. Investors may shift towards interest-bearing assets such as bonds and savings accounts to earn income, reducing the demand for gold and causing its price to decline. Higher interest rates can also raise borrowing costs, dampening economic activity and reducing gold demand in sectors like jewelry and manufacturing. Conversely, lower interest rates enhance the appeal of gold as an investment, as traditional interest-bearing investments yield lower returns. This can drive up demand for gold, leading to higher prices. Lower interest rates may also stimulate economic activity by making borrowing more affordable, further boosting gold demand and prices. In essence, the inverse relationship between interest rates and gold prices reflects changes in opportunity costs and investor preferences during different economic conditions.

Making charges:

The additional fees imposed by jewelry manufacturers and retailers, known as making charges, significantly influence the overall cost of gold jewelry. These charges encompass the expenses associated with crafting, designing, and marketing the jewelry and are typically calculated as a percentage of the base price of gold. Higher making charges result in increased costs for gold jewelry pieces. Consumers should be mindful of these charges when purchasing gold ornaments, as they can vary widely among different jewelers. Therefore, when evaluating the price of gold jewelry, it's crucial to consider both the prevailing market price of gold and the associated making charges to ascertain the total expenditure.

Festivals:

In India, the price of gold is closely intertwined with the festive season. Gold holds traditional and auspicious significance during festivals and special occasions such as Diwali, Dhanteras, Akshaya Tritiya, and weddings. During these festive periods, there is a surge in the demand for gold as people purchase it for gifting, personal adornment, and investment purposes. This heightened demand exerts upward pressure on gold prices. Anticipating this increased demand, jewelers and retailers may adjust their prices accordingly. Consequently, it is common to observe a rise in gold prices leading up to major festivals as individuals rush to acquire gold, and jewelers respond to the heightened demand with potential price adjustments. Following the festivals, prices may stabilize or experience a dip as demand returns to normal levels. Hence, for many individuals in India, the festival season significantly influences their decisions regarding gold purchases and, consequently, the pricing dynamics of this precious metal.

Inflation:

The relationship between inflation and the price of gold is multifaceted. Gold is often viewed as a hedge against inflation, leading to an increase in its price when inflation becomes a concern. Several factors illustrate how inflation influences the price of gold:

• Preservation of Value: Gold serves as a tangible asset that retains its value over time. During periods of inflation, the value of fiat currencies tends to depreciate as prices for goods and services rise. In response, investors often turn to gold as a means to safeguard their wealth from the adverse effects of inflation.
• Safe-Haven Asset: Gold is perceived as a safe-haven asset, particularly during times of economic uncertainty and high inflation. When investors are apprehensive about the purchasing power of their currency, they may increase their investments in gold, driving up demand and, subsequently, its price.
• Negative Real Interest Rates: Gold typically performs well when real interest rates (nominal interest rates adjusted for inflation) are low or negative. In instances of elevated inflation, central banks may maintain low interest rates to stimulate economic growth. In such scenarios, the opportunity cost of holding gold—since it does not generate interest or dividends—is diminished, making gold a more appealing investment option.
• Supply and Demand Dynamics: Inflation can also impact the supply and demand dynamics of gold. For instance, if inflation leads to heightened demand for gold jewelry and industrial applications, it can exert upward pressure on gold prices.

WHAT'S DRIVING THE SURGE IN GOLD PRICES IN INDIA IN 2024? 

Let's delve into some key factors driving this upward trend:

• Decline in the Dollar Index: The relationship between gold prices in India and the US Dollar Index (DXY) often follows an inverse pattern. A strengthening Dollar Index typically translates to lower gold prices in dollar terms, as gold is globally priced in US dollars. Conversely, when the dollar weakens, gold prices tend to rise. This correlation stems from the fact that a stronger dollar makes gold relatively more expensive for holders of other currencies, dampening demand and leading to price decreases. Conversely, a weaker dollar makes gold more affordable, stimulating demand and propelling prices upwards.
• Anticipation of Interest Rate Cuts by the Fed: There's an anticipation that the Federal Reserve might announce its first interest rate cut in June. Gold typically exhibits an inverse relationship with interest rates. Lower interest rates diminish the opportunity cost of holding gold, which doesn't offer interest or dividends, thus increasing its appeal and boosting prices. Conversely, higher interest rates can detract from gold's attractiveness as an investment, resulting in price declines. With expectations of interest rate cuts both in the US and India, gold prices are poised to continue their ascent.

Chris Weston, head of research for Pepperstone Group Ltd said as per Bloomberg, "What we saw last night was the green light really for gold traders to come back in. The Fed have said that right now they’re tolerant of the inflation that we’ve seen, they’re tolerant that the labor market strength is not going to be the impediment.”

• Heightened Demand from China: Chinese demand for gold has been on an upward trajectory in recent quarters. The Chinese central bank's significant additions to its gold reserves have contributed to price hikes not only in the US but also in India. Additionally, a new trend has emerged in China, where gold purchases are gaining popularity among the younger demographic, further fueling demand and bolstering prices.

WHY GOLD RATES FLUCTUATE ACROSS DIFFERENT INDIAN CITIES?

Gold rates vary across different Indian cities due to a variety of factors:

• Local Demand and Supply Dynamics: Each city possesses its unique cultural practices and preferences, influencing the demand for gold. Cities with a higher affinity for gold may witness increased demand, which can exert upward pressure on prices. Likewise, the availability of gold within a city, influenced by factors like local mining activities or distribution networks, impacts pricing dynamics.

• Transportation and Logistics Costs: The expenses associated with transporting gold to different cities and maintaining jewelry stores contribute to pricing differentials. Cities located in proximity to major gold markets or refineries often benefit from lower transportation costs, potentially leading to more competitive gold prices.
• Taxes and Duties Imposed: Variations in local taxes and duties, such as state-level value-added tax (VAT) and excise duties, add to the final price of gold jewelry. These taxes are typically levied on top of the base gold price, resulting in disparities in overall pricing across cities.
• Local Economic Conditions: The economic landscape and income levels prevalent in different cities influence gold prices. Affluent cities with higher disposable incomes may exhibit greater demand for luxury gold items, thereby affecting pricing trends within the local market.
• Currency Exchange Rate Fluctuations: Given that gold is traded internationally in U.S. dollars, fluctuations in the exchange rate between the Indian Rupee and the U.S. dollar can introduce variability in gold prices across cities. Changes in exchange rates directly impact the cost of importing gold into the country, thereby influencing local prices.
• Making Charges Levied by Jewelers: Local jewelers often apply varying making charges for crafting and designing gold jewelry, contributing to differences in overall gold prices between cities. These charges are reflective of craftsmanship, design intricacy, and overhead costs associated with operating in specific locations.
• Level of Competition Among Jewelers: The degree of competition among jewelry retailers within a city can significantly influence pricing dynamics. Cities with a higher concentration of jewelers may experience more competitive pricing as retailers vie for market share, potentially driving down prices.
• Government Regulatory Framework: Local or state-level regulations, particularly concerning hallmarking standards and quality control measures, can impact the quality and price of gold jewelry. Compliance with regulatory requirements may entail additional costs for jewelers, which can be passed on to consumers, thereby affecting overall pricing.
• Global Market Trends and Geopolitical Events: Gold prices are subject to broader global market trends, including shifts in international supply and demand dynamics, geopolitical events, and broader economic conditions. These external factors can exert significant influence on gold prices, transcending local market dynamics.

Due to these factors, gold rates may differ from city to city within India. It's important for consumers to consider these factors when purchasing gold to ensure they get the best deal.

IMPACT OF RISING GOLD PRICES ACROSS INDUSTRIES

Industries across the board experience varied impacts with the surge in gold prices. Let's delve into how different sectors are affected:

1. Consumers

• Purchasing Power: The uptick in gold prices can diminish consumers' purchasing power, notably in regions where gold holds cultural and ceremonial significance, impacting their ability to afford gold jewelry and related items.
• Substitution Effect: Facing soaring gold prices, consumers may turn to alternatives, substituting other materials or assets for gold in their purchases, especially for jewelry and ornamental purposes.

2. Global Economy

• Inflation Expectations: Escalating gold prices often signal heightened inflation expectations, which ripple through the economy, influencing monetary policies, interest rate adjustments, and overall economic growth trajectories.
• Risk Sentiment: Fluctuations in gold prices reverberate across global markets, influencing market sentiment and investor risk appetite, particularly during periods of economic instability or financial market volatility.

3. Central Banks

• Reserve Management: Central banks with substantial gold reserves witness a boost in the value of their reserves as gold prices soar, impacting their reserve management strategies and financial stability measures.
• Monetary Policy: The surge in gold prices can sway central banks' monetary policy decisions, particularly in economies where gold plays a pivotal role in the monetary system, influencing interest rates and currency valuations.

4. Governments

• Export Earnings: Governments of gold-producing nations stand to gain from increased export earnings fueled by surging gold prices, providing a welcome economic boost through enhanced trade revenues.
• Fiscal Policy: The spike in gold prices prompts governments to reassess fiscal policies, including taxation structures and regulatory frameworks governing the gold mining sector, to optimize economic outcomes and ensure sustainable growth trajectories.

FORECASTING GOLD PRICES: INSIGHTS FROM EXPERTS

According to experts, the timeframe for gold to reach the Rs 2 lakh level hinges on various factors, particularly global uncertainties and conflicts. They highlight how historical data illustrates the significant influence of geopolitical tensions and economic crises on gold prices, often resulting in rapid escalations within relatively short time frames.

Jateen Trivedi, VP Research Analyst at LKP Securities, points out that recent events such as rupee depreciation, geopolitical unrest, and the pandemic have contributed to a substantial increase in gold prices, with a notable 75% surge over just 3.3 years. Trivedi indicates that while gold prices tripled over a span of about 9 years previously, a similar trajectory may occur again, with the Rs 2 lakh mark potentially being reached within the next 7-12 years.

Some experts express even greater optimism about gold prices, foreseeing a tripling and surpassing of the Rs 2 lakh level sooner. Surendra Mehta, National Secretary of the India Bullion and Jewellers Association, emphasizes geopolitical tensions between nations like Iran and Israel, as well as China and Taiwan, alongside heavy paper trading of gold, as catalysts for gold's upward trajectory. Mehta suggests that gold prices could triple within the next 6 years due to these uncertainties, leading to de-dollarization.

However, there is acknowledgment of outliers, with instances of the tripling period extending to almost 19 years, underscoring the unpredictability of market movements. Vikram Dhawan, Fund Manager and Head of Commodities at Nippon India Mutual Fund, underscores the cyclical nature of gold as an asset, subject to bull and bear markets, resulting in fluctuating annual returns. Despite this variability, gold remains a favored choice among consumers and investors, expected to meet their return expectations in the absence of better alternatives.

Conclusion:

"Gold is a treasure, and he who possesses it does all he wishes to in this world." - Christopher Columbus

This quote by Christopher Columbus emphasizes the immense value and power associated with gold. Columbus, known for his exploration and discovery voyages, recognized gold as a symbol of wealth and influence. In his time, possessing gold meant having the ability to fulfill one's desires and ambitions. The quote suggests that gold was not just a precious metal but also a means to achieve one's goals and aspirations. Overall, it highlights the significant role that gold has played throughout history as a symbol of prosperity and opportunity.

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