Gold price at record high: What’s fuelling the surge?

0
328

Domestic gold surged to a fresh all-time high as the most active MCX near-month futures boomed to Rs 63350 per ten grams last week. Firm overseas prices, weak Indian rupee and expectations of an increase in jewelry demand and peak wedding season propelled the sentiment towards the metal.

The Indian trade body is expecting business from around 38 lakh weddings which will be solemnised in the next three weeks. Weddings in India account for about half of the country’s yearly gold demand. Demand for wedding jewelry is expected to peak this year. And the forecast of an increased demand for jewelry assisted in lifting the domestic gold prices.

In India, there is usually a spike in demand for gold from November to February, which is wedding season. This is because gold holds cultural and religious significance in Indian weddings, and it is considered auspicious to buy and gift gold during these occasions.

A weak Indian rupee is another reason for prevailing high gold prices in the country. The Indian rupee has been hovering near its weakest level in the last several months. When the rupee is weak compared to other currencies, the cost of importing gold rises, leading to higher domestic prices. Since gold is internationally priced in US dollars, a weak rupee means more money is required to purchase the same amount of gold.

Since Indian gold prices are highly correlated with international prices, a firm overseas price also assisted the metal. International gold prices serve as a benchmark for gold prices worldwide, including India.

Gold in the key London spot market also surged to record highs. It went up to $2075 an ounce last Friday, gaining more than 28 percent in the last twelve-month period. This was due to a shift of investor preference from US assets to safe assets like bullion.

There are forecast that the US Federal Reserve may end its policy tightening and start cutting rates by next year, causing weakness in the US dollar and bonds. The US dollar index corrected by more than 4 percent since October and the US treasury yield started sliding moderately.

The relationship between the US dollar and gold is often characterized by an inverse correlation. When the US dollar weakens, gold prices tend to rise and vice versa.

Earlier, gold prices in the international markets were primarily driven by real interest rates. Robust US economic release boosted bets of higher-for-longer rates which ended up lifting the US currency and bond yields. Short-term investors were attracted by higher real income by investing in government bonds and currency which make bullion less attractive in relative terms.

Domestic gold is most likely to continue with its bullish outlook. Even though there are chances of a mild correction, a weak INR and expectations of jewelry demand are likely to offer downside support to the metal.

Meanwhile, there are some immediate headwinds to gold in the international market.  US policy decisions and the performance of US assets would dominate the metal’s outlook initially. Higher rates can make alternative investments, such as bonds and savings accounts, more attractive because they offer a higher return. Easing geopolitical tensions, bright US economic releases, and booming global equities are likely to keep investors away from taking big bets on safe commodities like gold.  

First published in Economic Times

LEAVE A REPLY

Please enter your comment!
Please enter your name here