Gold prices in India have seen significant changes over the past year. Data from the World Gold Council revealed that the average gold price for 10 grams of 22-carat gold in India was INR 41,500 in September 2023, marking a substantial 12% decrease from INR 47,000 in January 2023. This decline is the most significant since April 2020 when the global economy was impacted by the Covid-19 pandemic, disrupting both the supply and demand dynamics of the gold market.
However, given the current global economic and geopolitical situation, increased attention to the gold market and a strong increase in the gold reserve by the Central Banks across the world, the yellow metal prices have taken a reverse course. Gold prices have risen by 1.97% compared to the previous week in India. Gold is believed to perform well in times of economic stress. But does it?
From 1973 to 2020, there have been eight recessions. In these 8 conditions, gold had outperformed the S&P 500 in 6 six such instances. Gold performed very well in the other six instances. Six months into the onset of the recession to six months after its conclusion, gold has shown an average rally of 28% on average, surpassing the S&P 500 by 37%.
Even during the great depression in 2008, the Federal Reserve cut the funds rate from 4.75% in late 2007 to 0% by 2009. The rates were plateaued near zero for the next six years, and the gold prices rallied almost 50% during the period. In the past, when US sanctions raised concerns amongst Russia’s trade partners and gold was chosen to bypass the dollar-based payment system SWIFT, many countries started to accumulate gold.
In a country like India, highly rich in culture and tradition, gold is a sign of wealth and seen as a sign of store value and is often associated with every festive or celebratory occasion. Gold often is a part of their rituals or a gifting ornament during wedding ceremonies or any other auspicious occasions. In rural India, it takes a defensive measure, where primarily it is seen as an investment and can be used as a hedge against difficult financial periods. .
Often looked at as a long-term investment, gold is not for speculative trading. No one buys gold under the pretext of selling it the next year for a quadruple value. It is primarily for protection against inflation, current devaluation, liquid assets and other factors. Gold investments are favourable for the long term and can be used as an avenue for asset allocation and portfolio diversification.
Interestingly, it was a favourable investment choice among Indian investors last year as it delivered an impressive 14% return in the calendar year 2022.
As per the World Gold Council data, annual gold demand (excluding OTC) increased 18% to 4,741t, nearly matching 2011's record-high investment demand. A record 1,337t Q4 demand boosted the robust annual total. This is mainly due to the surge in demand by the central banks across the globe.
Gold price movement depends on the Dollar Index and FED rate. The current high-interest rate scenario in the US, attracting more investors, resulted in higher demand for the US dollar and as a result demand for gold has been muted for some time. However, the conflict between Israel and Hamas has created a global crisis that has created a reverse trend in gold prices. In the last week of September ‘23, gold witnessed a downturn in its prices. On Oct 6th, 2023, the price of 10 gm of 24k carat gold stood at INR 58,505* and then saw a sharp increase.
Well, the global conflict is not the only reason. With the onset of the festive season, an increase in demand for the yellow metal is observed, further amplifying its prices. Also, it is a traditional hedge against inflation, and with worries about rising inflation, gold's demand as an inflation hedge may surge.
The year 2022 was full of rate hikes by central banks globally and as a result demand for debt investment went up drastically. Attractive FED rates pushed demand for US treasuries around the world. As we know that there is an inverse correlation between the dollar index (DXY) and gold, bullish DXY kept the demand for gold muted. But, from an investment perspective, Gold looks attractive. With a lower base, gold has more potential to generate higher returns from now onwards. Recovery of gold demand is slightly moving up due to demand from central banks across the globe.