Why are gold prices rising? Should you buy or sell gold now? Ziraat Times explains

13 April 2024

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Srinagar, April 13: Gold prices have been experiencing a significant price surge in India, including in J&K in recent months. Gold markets in Srinagar and Jammu are mostly without customers. Gold coins have almost disappeared from key Srinagar gold markets like Hari Singh High Street.

This trend aligns with a global rise, but the factors driving it in the Indian context are a mix of international influences and domestic economic realities. Ziraat Times here delves deeper into the reasons behind this rise and whether it is a good time to buy and sell gold now.

Global factors:

The ongoing conflict in Ukraine and the recent flare-up between Israel and Hamas have injected a dose of instability into the global order. Investors, ever wary of risk, flock to gold as a “safe-haven” asset during such times. Gold’s historical stability and lack of correlation with the stock market make it a desirable hedge against potential economic turmoil caused by these conflicts.

Weakening US Dollar: The US dollar, traditionally seen as a strong currency, has been experiencing some weakness recently. This makes gold, priced in dollars, more attractive to investors holding other currencies. A weaker dollar translates to a relatively cheaper price for gold, enticing buyers and pushing prices up.

Central Bank Buying Spree: Central banks around the world, including Reserve Bank of India (RBI), have been steadily increasing their gold reserves. This is seen as a way to diversify their holdings and mitigate risks associated with other asset classes. This increased demand from central banks naturally puts upward pressure on gold prices.

Domestic factors fueling the price rise in India

India, like many countries, is grappling with rising inflation. As the cost of living goes up, the purchasing power of the rupee falls. Gold, however, is perceived as a hedge against inflation. Historically, gold prices have tended to rise alongside inflation, protecting investors from the erosion of their purchasing power.

Expectation of Lower Interest Rates: The union government and the RBI are expected to take steps to address the economic slowdown, potentially including lowering interest rates. While this could stimulate borrowing and investment, it also makes gold a more attractive option compared to fixed-income instruments like bonds that offer lower returns in a low-interest-rate environment.

Cultural significance and upcoming festivals: Gold holds a special place in Indian culture, used for personal adornment, investment, and auspicious occasions like weddings and festivals. The upcoming festive season, particularly Diwali, traditionally witnesses a surge in gold demand as people buy the precious metal for gifts and religious purposes. This seasonal spike in demand further contributes to rising prices.

Chris Wood and the China factor:

Chris Wood, Global Head of Equity Strategy at Jefferies, offers a slightly different perspective on the gold price rise. He argues that while the factors mentioned above play a role, the most significant driver might be resurgent demand from China.

China, the world’s largest gold consumer, has seen a recent increase in gold purchases. This could be due to a combination of factors, including economic stimulus measures by the Chinese government and a strategic move to diversify their foreign exchange reserves away from the US dollar.

While concrete data to confirm this theory is lacking, Wood suggests that China’s renewed interest in gold could be a significant force behind the current price increase.

So it is a good time to buy and sell gold?

The outlook for gold prices in India remains uncertain. The geopolitical situation, inflation trajectory, and interest rate decisions will all play a role in determining its future course. However, considering the confluence of global and domestic factors, a sustained rise in gold prices seems likely in the near to medium term.

Should you invest now?

The rise in gold prices presents both opportunities and risks for investors. For those seeking a hedge against inflation and market volatility, gold can be a valuable addition to their portfolio. However, the price of gold can be volatile, and investors should consider their risk tolerance and investment goals before making any decisions.