Negative investor sentiment due to a rapid rise in global interest rates, a strong US dollar, and higher bond yields, gold lost its glitter throughout this year. London spot gold prices fell for the seventh consecutive month in October, shedding more than 10% since January.
Rising interest rates are typically an obstacle for gold as it is an interest-free investment. Since bank rates are higher, gold appears to be less important for investors. During the Covid-19 era, many large economies took steps to strengthen their economy through various policy changes which include cutting down interest rates. But now, many such central banks are on the path to hike rates to tackle higher inflation.
A surge in the US dollar has been a headache for gold and other assets. The US dollar traded at a multi-decade high, gaining more than 17% since the start of the year.
A firm dollar has a manifold impact on gold. Since gold prices are quoted in US dollar, a rally in the greenback leads to a fall in gold prices. Fed’s aggressive monetary tightening measures compared to other major central banks have made US currency an attractive destination for more yields. The US dollar’s safe-haven appeal also creates competition for gold.
However, for non-US gold investors, gold performance remains strong.
Gold prices in the key China and Indian markets traded at a premium. Local gold demand in these markets has been a key driver of high rates.
Supply bottlenecks and controls on gold imports elevated China gold prices. In India, hopes of festive and key wedding season demand supported the trend. A weak Indian rupee and prevailing high tax rates also keep domestic prices higher than their international peers.
In the domestic market, gold prices gained by more than 5%, placed above Rs 50,000 per ten grams.
The Indian rupee weakened to above Rs 83 levels against the US dollar. Since a large chunk of our gold demand has been met through imports, a weak domestic currency increases the landed cost of the commodity in the country.
Prevailing high custom duty on gold also increases the premium in the domestic market. The Government of India recently increased the customs duty on gold to tackle the widening current account deficit.
Seasonal demand also brings some of the shine to domestic gold. Buying gold during the festive is considered auspicious in the country. Likewise, the ongoing wedding season is the traditional time for gifting gold, boosting domestic demand.
Looking ahead, the short-term outlook remains bleak in the overseas market. A strong US dollar and high bond yields continue to weigh on investor sentiments.
However, prevailing high domestic demand and weak currency continue to support domestic prices. Though Indian gold prices generally depend on foreign benchmarks, domestic demand, fluctuations in the value of the Indian rupee, and government policies can experience significant price variation.
Historically, the fact remains that gold investment in India is profitable on a long-term basis. Indian gold prices held at around Rs 8000 per ten grams in the 2005-2006 periods but went up to Rs 55000 per ten grams by March 2022. It currently traded above Rs 50000 mark on the domestic futures platform.
Although there may be significant price corrections in the short-term, gold is a good long-term investment. Investors are advised to buy and accumulate in small amounts during price corrections.
(Author: Hareesh V, Head of Commodities at
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