Gold Price Touches New Peak, What Is Pushing Rates Higher?

Gold is considered to be synonymous with safe investments in India. The precious yellow metal has been acquired by individuals and families since ancient times as a measure of security to be liquidated in times of financial emergencies. It is considered to be an integral part of festivals and weddings in India.

While most of the time the jewellery is kept locked away at home or in a bank locker, with the gold rates touching new highs, these assets are now been seen as a lucrative medium for raising funds by means such as gold loans.

The price of gold has been on the rise in recent times crossing record highs of over Rs 60,000 for 10 grams of 24k gold (99.9%). Let’s see some of the factors that have led to the recent sharp rise in the value of gold.

International Factors

India is mainly an importer of gold, therefore, the domestic price of gold is directly related to the international spot price in the international market. The spot price is decided in the London bullion market. So, if the spot price rises, the cost of gold will also increase.

Many geo-political factors are also responsible for the fluctuation in gold prices such as the on-going conflict between Russia and Ukraine, and the strained ties between the US and China. Such uncertainties lead to a rise in gold’s appeal as a safe haven asset, thereby pushing up the demand and hence the price of gold.

Demand and Supply

Demand and supply principles govern the prices of all goods in an economy, and gold is no exception. The price of gold will increase in tandem with an increase in demand. Therefore, a surge in demand for gold is mostly witnessed around festivals, during the wedding season, or following a successful rainfall that benefits the agriculture-dependent rural population.

In the post-pandemic era, the importance of gold as a hedge asset has increased, with the COVID-19 pandemic leading to uncertainty over the returns on other forms of investment in times of an economic slowdown. Therefore, the demand for gold as a security has increased as a safe asset that can be liquidated in times of financial emergency.

Inflation

A direct correlation has been seen between gold and the rate of inflation. Any increase in inflation will result in a decline in the value of the rupee, which will in turn, raise the price of gold. As was seen in the recent past, as inflation rose in the country, there was a corresponding increase in demand for the yellow metal. This drove up the price of gold to a higher range. There have, however, been spurts of ease in gold prices as a result of the government's numerous efforts to curb the inflationary trend.

Value Of The Indian rupee

India imports gold from many other nations. A country's currency depreciates when the import of gold increases, while the value of the currency increases when exports increase.

The spot price of gold is decided in the London bullion market, therefore it is valued in American dollars, euros, and pounds. So, the value of the Indian rupee influences the price of gold. When the value of the rupee falls, the exchange rate is higher. A higher exchange rate leads to a higher price.

Considering the fact that the majority of physical gold is imported, there will be an appreciation in the price of gold in rupee terms, if the rupee weakens against the dollar. Therefore, as the rupee has significantly weakened against the dollar over the past few months, it has also pushed the gold rates higher.

Conclusion

The steady rise in the price of gold has also led to a growth in the gold loan activity in the country. This is mainly because when the price of gold increases, it makes the jewellery or ornament people own more valuable. Therefore, when they think their gold will fetch a better value they are more inclined to opt for a gold loan.

Thereby it is more of a win-win situation for both the lender and the borrower, as it means better loan value for the borrower who can get more money for the same amount of gold, and for the gold financiers it means a growth in the loan books.

While there is a wide unregulated market out there with a number of small local lenders and pawn shops, one must be careful and take a gold loan from a reputable lender like IIFL Finance, as they offer a hassle-free process, with attractive interest rates and at a very nominal cost. IIFL Finance also ensures the safety of the ornament and provide proper documentation.