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April 05, 2018

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Tumbling of Gold Prices in India & Future Course

Published : Tuesday, 18 August, 2015 11:00 PM

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Tumbling of Gold Prices in India & Future Course

After reaching an all-time high of INR32,460 per 10 gram on November 26, 2012, the gold prices in India have witnessed a continuous decline. In the last few months, the decline has been much steeper and currently it is trading near INR25,000, the lowest in the past four years. India, which was the largest gold consuming country in the world till the year 2014,became the second after China in the first quarter of the current fiscal year and China gained the top slot.

There are several domestic and global factors responsible behind the fall in consumption as well as prices of gold in India some of which are as under –

  • Gold is considered as the safest avenue of investment. Therefore, during a crisis period, when returns on stock and bond become risky, people tend to invest in gold. As currently global economic fundamentals are strong, gold is not the preferable investment avenue as other instruments are providing better returns. Barring the recent Greek economic crisis and economic slowdown in China which are yet to show any global impact, there is no major crisis in the world. In fact Greek crisis is also mellowed down after agreement on second bailout package. Chinese slowdown is one of the factors which made China top consumer of gold of world.  
  • There is an inverse relation between inflation rate and gold prices. During inflation, the value of currency tends to fall making it less lucrative to save in the form of currency and gold becomes the preferable choice of saving. The moderate crude prices resulted in low rate of inflation. All major economies of the world are currently facing moderate inflation.
  • Other than gold, the US dollar is the most acceptable mode of payment in the international transactions. The US dollar and gold have an inverse relation. Since, the recent period has seen a strong dollar demand of gold in international market has shrunk.In wider markets, the dollar hit a three-month high against a basket of currencies, making dollar-priced gold more expensive for holders of other currencies.
  • The Federal Reserve, which plays the role of central bank in the US, is expected to announce interest rate hike. An increase in US interest rates will attract investment in its domestic market making gold less attractive for investment.
  • Poor monsoon for two consecutive seasons had also affected the demand of gold in India. The rural India is responsible for around two third of gold demand. Poor monsoon affected the income of rural India thus affecting the demand for gold.
  • The Reserve Bank of India (RBI) and government have discouraged the gold imports by increasing the import duty. Besides, the Indian stock market is also rallying making gold the second choice of investment after stocks. After the hike in gold import duty to 6% in January 2013, India imported 200 tonnes of gold in January-March 2013 which was 24% less than corresponding period of the previous year.  
  • In July 2015, China sold about 33 tonnes of gold in the Shanghai spot market putting additional downward pressure on the gold prices.

Future Course

Experts believe that bearish trend in the prices of gold would continue in the current fiscal where it can fall up to INR20,500 per 10 grams in India by March 2016 if US Federal Reserve goes ahead with interest rate cuts. Anticipating the interest rate hike, most central banks in the world are buying dollars instead of gold to counter the dollar outflow. This trend is likely to continue in the near future. Though occasional rise in prices cannot be ruled out due to rise in demand like during the marriage season in India, but broadly, the prices will remain moderate in the wake of low inflation, strengthening dollar possible interest rate cuts.  

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