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The gold price is hitting new highs every alternate day in the last couple of months, attracting the interest of many investors.
From its early days of discovery, when it was primarily used for jewellery-making, the utility of gold has evolved a lot. In today's modern economy, it plays a significant role. All the major economies around the world keep a particular percent of its reserves in gold, with the US keeping almost 75% of its total reserve in gold.
For economies, it acts as a medium to combat any untoward fiscal crises and inflationary situations. Gold rates in India serve as an indicator of the financial health of the country. Low rates of gold translate to stability, whereas rising prices are a red flag of a struggling economy, and investors are turning to gold to protect their investments.
In the period between 2008-2012, the rates of gold in the market have more than doubled, outperforming every other asset class. In fact, gold has successfully preserved the wealth throughout its history spanning thousands of years.
As gold is a safe haven asset and able to improve risk-adjusted returns of investors, it is considered as the best store of value of all time. Investments made in gold have always yielded positive returns in the long-term.
Let's look at how the gold rate in India has performed and the factors responsible for its price movement.
The gold rate in India moves as per the price movements observed in international markets. But there are a host of other domestic factors that have a considerable impact on the gold rate in India.
Here's a rundown of the top five factors that impact the gold rate in India:
Being superior to paper-denominated currencies, which are subject to depreciation, gold is often used to hedge inflation. During an inflationary situation in the country, the demand for gold increases. As a result, the gold rates in India will witness an upward pressure. And, during the deflationary situation, we see softness in gold prices due to reduced demand. The gold price factors in both international and domestic inflation.
Interest rates have an inverse relationship with the prices of gold in the economy. Rising interest rates indicate strength in the marketplace, which results in higher inflation. Also, the rise in the yield of fixed income securities renders investment in gold unattractive. Therefore, gold witnesses a reduced demand, with prices remaining almost flat. In the lower interest rate scenario, there is a shift of demand towards gold, thus pushing the price of the metal higher.
This is one of the most crucial factors in determining the gold rate in India. Since India depends on imports for meeting the demand, the gold rate in India is hugely impacted by the volatility in the rupee/dollar exchange rate. A weak rupee against the dollar will push the gold rate in India higher and vice versa. The rupee-dollar exchange rate does not impact the price of gold in the international market.
It is one of the most overlooked points, but the supply and demand equation hugely impacts the gold rate in India. When the demand for gold increases, the prices of gold tend to go up. On the other hand, in case of an oversupply or a weak demand scenario, the prices tend to remain flat or weak.
Rural India accounts for almost 60% of the total gold demand. Therefore, when the weather is favourable, farmers tend to purchase gold from their earnings to create an asset. Thus, the demand for the precious metal increases, and so does the gold rate in India. On the other hand, during crop failures or a weak monsoon season, farmers tend to sell the same gold to raise funds.
The cost of gold in 2017 was more or less stable and range bound. In rupee terms, the gold prices have witnessed a growth of a mere 4% during the year. The annual average gold rate in India in 2017 was Rs 29,667.50, with a marginal rise of 3.6% from 2016.
|Opening Price (02nd Jan 2017)
|Closing Price (30th Dec 2017)
|High (08th Sept 2017)
|Low (02nd Jan 2017)
Strength in the global equity market, higher consumer confidence, and lower unemployment rates in the US helped the gold prices to remain under check. During this period, the Indian indices (Nifty 50 and Sensex) rose by over 25%.
In 2018, the gold rate in India witnessed volatility throughout the year on account of geopolitical tensions, fluctuating rupee/dollar rate, and volatility in the global stock market. However, the Brexit crisis that caused some concerns in the Eurozone led to increased demand for gold in the second half of 2018, resulting in a close near higher levels of 2018.
|Opening Price (01st Jan 2018)
|Closing Price (31st Dec 2018)
|High (18th Oct 2018)
|Low (01st Jan 2018)
The gold market closed the year 2019 at a record high level and was the strongest year since 2010. The gold rate in India was mostly stable in the first half of 2019, but it gained strength in the second half of the year. The one-year returns from gold in 2019 was a whopping 24% and has been the best asset class for investors in 2019. The bullish trend was more due to the uncertain global economy, geopolitical tensions, and falling US bond yields. The demand for gold increased in 2019, mainly due to hedge against risk.
Also, the weaker rupee against the dollar supported the gold rate in India to maintain the bullish trend.
|Opening Price (01st Jan 2019)
|Closing Price (31st Dec 2019)
|High (04th Sept 2019)
|Low (01st Jan 2019)
The annual average gold rate in India in 2019 was Rs 35,220, higher by 12% compared to the annual average gold rate in India in 2018.
The bullish trend in gold continues through 2020, with prices hovering above the Rs 40,00+0 mark since the start of the year. On 05th Mar 2020, the gold rate in India made an all-time high level of Rs 44,441.
For the rest of the year, the gold rate in India is most likely to maintain the bullish streak due to slowdown in the global economy, economic uncertainty, and lower consumer confidence index.
The gold rate in India recorded the sharpest increase in the last 12 months and is in tandem with the international gold rate and the rupee/dollar exchange rate.
To determine the long-term trend in the gold rate in India, many analysts and investors check whether gold is trading at a discount or not by checking the Dow/Gold ratio.
The Dow/Gold ratio refers to how many shares of Dow Jones Industrial Average (DJIA) index one can theoretically purchase with gold. It can be calculated by dividing the Dow index by the price of gold. For example, currently, DJIA is trading at around 23,000 level, and the gold price is approximately $1,520/oz, so the Dow/Gold ratio comes at 15.13. This indicates that gold is trading at a discount, and gold will continue to gain strength in the long term.
The Dow/Gold ratio peaked in 2018 at 22.29 in Oct 2018 and has been in a declining trend since then.
While studying the historical trends of gold rate in India, it offered investors many key insights into future price trends. For example, after the Dow/Gold ratio peaked in Oct 2018, gold continued to gain strength. Moreover, the uncertain economic environment also fuelled the surge in gold demand. Although the highest gold rate in India of Rs 44,441 was recorded on 05th Mar 2020, the sharpest increase of gold rate in India was recorded between the period of May 2019 - August 2019. During these four months, the gold prices increased from Rs 31,740 to Rs 39,823 - an increase of 25 per cent, outperforming every other asset class in the period. The gold rate in India will continue to remain high due to the weakness of the rupee against the dollar, low-interest rate, sell-off in the equity market, and fragile global economic conditions. And, as gold is trading at a discount (Dow/Gold ratio), in the long term, it will continue to sell at a much higher premium.