Too High to Believe Gold Prices! But Why?

Are you also wondering about the skyrocketing prices of Gold? Well there are reasons listed below backing the shooting prices.

Gold Prices have appreciated almost 27% in India, since the advent of 2019. The increase was the highest in August, when gold hit Rs. 40,000 per 10 grams mark, up from Rs. 34,303 at the beginning of August. Why is there a sudden surge in the prices? Let us decode the intricacies in the following article.

Why does the price of gold fluctuate?

Apart from the law of demand and supply, which governs the price of any commodity, risk aversion and appetite play a central role in the performance of gold price.

During an economic boom, investors opt for riskier stocks since they believe that would generate higher returns. However, in times of economic uncertainty and currency fluctuations, gold works as a safer bet.

For instance, the prices of gold slumped in the year 2016 when Trump won the US general elections since it was believed that his policies would lead to higher interest rates, a stronger dollar and better returns from other investments.
In the periods of low-interest rates, gold provides better returns as compared to bonds or saving accounts with lower rates.
Geopolitical instability also plays a significant role in driving gold prices. Other factors, such as jewelry demand, influences the cost.

Which factors are driving up the gold prices currently?

  1. US-China Trade War: Escalating tensions between the US and China and the ongoing trade war has resulted in soaring gold prices. Over the past year, both the economies have imposed a series of tariffs on billions of dollars of each other’s goods.

How exactly a war between two nations impact gold prices?

This is because the investors believe that the ongoing trade war would undoubtedly impact the financial health of the economy. This would further invite rate cuts from the central bank of the country to stimulate demand. The falling interest rates would thus make bonds unattractive while boosting the demand for safe-haven assets such as gold.

  1. Falling Rupee: In India, apart from global tensions which have stimulated the price of gold, a weakening rupee against the dollar has also led to a surge in the gold prices. Since India is one of the major importers of gold, a depreciating rupee would logically, make it difficult for us to import gold. This would ultimately make it difficult to match the demand against the supply. Therefore, the prices of gold will surge.
     
  2. Global Recession Fears: After nearly ten years of steady expansion, the world economy faces growing concerns of a looming recession. Major economies such as China, Britain, and Germany are entering the downward phases of contraction, in Asia, the mounting pressure of the US-China Trade war (as discussed above) has disrupted global supply chains which have disrupted businesses in many countries. India too reported a mere 5% GDP growth rate (See Article) which is one of the lowest GDP growth rates in six years.

As far as the US economy is concerned, US manufacturing output shrunk for the first time in three years as per the Purchasing Manager’s Index(PMI). This indicates a slowdown in the world’s largest economy.

As we can see, a slowdown in major economies of the world would force investors to switch to haven assets such as gold, which would henceforth become the reason for rising gold prices.

Conclusion

Soaring gold prices is a situation to look upon since it has profoundly impacted the demand for gold, particularly in India. As per the estimates, gold imports plummeted 73% from a year ago to the lowest level in three years. However, the risk sentiments are certainly improving since China agreed to hold trade talks with the US in early October. This has impacted the safe-haven appeal of gold, depreciating its prices.

-Gaurja Newatia

 

 

 

 

 


Posted On: 06 Sep 2019 Home / Investing / Too High to Believe Gold Prices! But Why?