How global dynamics are fuelling gold price surges in India

The price of 10 grams of 999 gold nearly tripled over the course of 9 years, with prices shooting over the last several months.

On April 23, 10 grams of gold stood at over Rs 73,500. Experts now feel that Indians, who have traditionally looked at the yellow metal as item of consumption, would start looking at gold as an investment item.

Expanding investment portfolios to include various assets, such as gold, can aid in minimizing risks linked with inflation, they underscore.

Let’s understand the reasons that pushed gold prices through the ceiling and whether this trend will continue.

According to Prasanna Pathak, Director, Asit C Mehta Financial Services Ltd., "Generally, there is an inverse relationship between gold and US dollar. Also, the US dollar, in turn, is inversely related to US interest rates."

When inflation rates escalate, the purchasing power of fiat currencies diminishes, prompting investors to seek gold as a means of preserving value, consequently pushing its price higher. However, this correlation is complex and not consistently direct, as other economic variables can also influence gold prices during periods of elevated inflation.

After the Russia-Ukraine war and the freezing of Russian dollar reserves, many central banks started buying Gold in their Forex kitty against dollars. This has created additional demand for gold in the last year or so, which is reflected in Gold prices, notes Pathak.

The People’s Bank of China bought gold for the 17th straight month in March, adding 160,000 ounces to bring reserves to 72.74 million troy ounces of gold, according to Reuters.

According to a research note from Capital Economics dated April 9, Chinese investors are turning to gold as a substitute asset amidst declines in property values and equity prices in recent years. UBS suggests that the growth in India's GDP is fueling similar increases in gold reserves for other central banks, such as India and Turkey, reported CNN.

A research note from JP Morgan in March said countries not aligned with the US might be accumulating gold as a strategy to diversify away from dollars, aiming to lessen their vulnerability to sanctions.

Rising demand from central banks is likely to continue and may push the prices up, according to some experts.

The other reason was that the US Federal rates were expected to be cut this year, which led to a weakening of the dollar, which further strengthened gold prices, according to Pathak.

However, recently, with inflation print coming higher than expected, the Fed's rate cuts seem to have been pushed further away. This has led to a stronger dollar and subsequent weakening in Gold prices’, he added.

It's noteworthy that gold is traditionally considered a safe haven asset during times of political uncertainty. With elections scheduled in over 60 countries this year, including the US presidential election, the increase in geopolitical and economic unpredictability highlights the enduring stability of the precious metal's value.