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Rising Gold Prices: What are the reasons?

Gold Price rise: The gold prices in India hit a new high in August with 10 grams of 24-carat gold costing Rs 38,465.00 on Saturday.

Aug 13, 2019 09:59 IST
Gold Price Rise

Gold Price rise: The gold prices in India rose to a new high on August 10 with 10 grams of 24-carat gold costing Rs 38,465.00 in New Delhi. This sharp rise marks an increase of nearly 25 percent from Rs 30,560 in 2018.

The gold prices have seen a sharp rise with the turn of the new year, with the price of 10 grams of gold going up to Rs 32,905 at the beginning of the year to Rs 35,000 in February 2019. Though the gold prices slipped again to Rs 32000 in May 2019, they have been on a rise ever since then, turning gold into one of the safest investment options. The global trade war, weakening of international currency such as dollar and yuan and rise in global gold demand have been some of the major reasons for the sharp rise in gold prices.

Gold Price Rise: Key Reasons

1. Rise in Demand in India

One of the key reasons for the rise in gold prices is the rise in gold demand in India. The total demand for both gold jewellery and gold investment went by 13 percent in the second quarter of 2019. While the gold demand in India in the second quarter of 2019 was 213.2 tonnes, the total gold investment demand was 44.5 tonnes. In the second quarter of 2018, the total gold demand was 189.2 tonnes and total gold investment demand was 39.3 tonnes.

The sharp rise in demand can be attributed to a higher number of auspicious days and comparatively favourable pricing in April and May. According to the World Gold Council MD, Somasundaram PR, the full-year gold demand is expected to be around 750-850 tonnes in 2019.

2. Market volatility

The unpredictability of the market triggered by the US-China trade war, Trump’s policies, Brexit and other rising political tensions in the Middle East and fears of a global economic slowdown have led investors to fall back upon the traditional investment safe haven, gold thus, pushing its prices up. Investors tend to focus more on gold when other assets are losing value.

3. Weakening of currency

Currency is reported to be another major influencer of gold price. Gold is generally denominated in dollars and weakening of the Indian rupee against dollar results in an increase in the gold price in rupee terms. The weakening of rupee though does not have an impact on global gold prices. The weakening of the dollar will push up gold prices globally. Recently, China devalued Yuan by 2 percent against the US dollar, which led investors to scramble for a safe haven to invest their money.

4. Increased Central bank purchases

According to the World Gold Council, the global gold demand increased in the second quarter of 2019 due to record-breaking purchases by the central banks. Central banks reportedly bought 224.4 tonnes of gold in the second quarter of 2019, taking their gold purchase in the first half to 374 tonnes, which is most for any first half since 2000. The increase in central bank buying is one of the key drivers in the rise in gold demand.

Most central banks buy gold as a precaution against a volatile market scenario and the dollar. In 2018, the central banks had added 651 tonnes to their reserves, while the RBI added 42 tonnes. The RBI added more in 2019 and the country's gold reserves now stand at a record high of almost 618 tonnes.

5. Interest Rates

Recently the US Federal Reserve decided to lower interest rates, which benefitted the gold prices. Lower interest rates benefit non-interest yielding assets such as gold. As per analysts, the US Federal Reserve is expected to announce further cuts in interest. This comes amidst fear of a full-blown currency war between the dollar and Chinese Yuan, especially after the imposition of increasing trade tariffs by the Donald Trump administration on China.

The gold prices and interest rates have an inverse relationship. A rise in interest rates leads investors to fall back upon fixed-income investments that have a fixed return unlike gold, which does not offer a fixed return. Hence, the demand for gold in this case falls and the price remains low.