In the past few months, the market price of this precious yellow metal has skyrocketed globally, especially in India. Image Courtesy Agencies
Traditionally, gold has been an adored property in India, a possession of emotional value as well as a sturdy and supreme asset that can stand firm in the uncertain storms of global economic fluctuations and uncertainties.
Gold also has special cultural significance during weddings and religious festivals such as Dhanteras and Diwali. On these auspicious occasions, the demand for gold usually increases, and this anticipation usually leads to speculative buying by traders and investors, driving up its price.
Not just in India, the value of gold is deeply rooted in the history of human civilisation, as the metal has remained a symbol of wealth and prosperity for thousands of years. Its reputation for such high value ultimately stems from a social construction based on the common understanding that gold has been valuable in the past and will continue to be in the future.
The supply of gold is driven primarily by mining production. Major players in worldwide gold mining are China, South Africa, the US, Australia, Russia, and Peru.
Investors have long been enamoured by gold, and the price has steadily risen over the past five decades. Not only does gold retain additional value, but supply and demand have a huge impact on the price of gold, especially demand from substantial ETFs (Exchange Traded Fund). Government vaults, or central banks, are also a principal source of demand for gold.
Gold also moves in a contradictory motion to the US dollar, the reason being due to the fact that the metal is dollar-denominated, which makes it a hedge against inflation and a very comfortable blanket of security indeed.
All else remaining equal, a stronger US dollar tends to keep the price of gold lower and more controlled, while a weaker US dollar is likely to drive the price higher through increasing demand (because more gold can be purchased when the dollar is weaker).
In the past few months, the market price of this precious yellow metal has skyrocketed globally, especially in India, hitting its lifetime peak on April 8, as Gold Contracts on MCX hit Rs 71,080 per 10 grams as it rose Rs 440 or 0.62 per cent. So, what are the reasons for this sudden and meteoric rise in gold prices?
First of all, the worrying and rapidly escalating geopolitical tensions in the Middle East, the Russia-Ukraine war, and an uncertain impending presidential election in the US have led to unstable global markets, which is a key factor in the sudden bull rally in gold.
Secondly, the US Federal Reserve’s decision to increase interest rates in order to combat inflation-influenced currency markets has made alternative investments like gold less attractive. However, global uncertainty and inflation have overridden this rationale, pushing investors towards gold as a store of value and driving up prices.
Thirdly, and very crucially, after the US started imposing sanctions on China since 2020, in response to their support of Russia in the wake of the Russia-Ukraine war and human rights abuses in Hong Kong and Tibet, amongst other reasons, the Chinese central bank has purchased gold for the 17th straight month in March for their reserves in a bid to decrease their reliance on the dollar.
Bullion held by the People’s Bank of China rose to 72.4 million fine troy ounces last month, according to official data released earlier this week. China has been trying to reduce its dependence on the US dollar for a while now, and indeed, their dollar holdings have dropped by a third since 2011.
Not just China, but several other countries are also trying to reduce their dependence on the US dollar as part of their foreign reserves. This could also be read as a definite shift in power and global influence, from the traditionally dominant West to the emerging East.
This confluence of escalating geopolitical tensions, financial policy decisions, inflationary pressures, and increasing demand has led to this spike in gold prices.
In the future, gold will continue to be a safe haven for investors for its potential to store value in the midst of global currency debasement and will also appreciate in times of low interest rates.
Though it is advisable not to jump on any trending bandwagon immediately, especially when motivated by such mercurial global events, gold will always continue to be a preferred portfolio asset.
So what are the safest ways that you can buy gold?
While buying gold, purity is always a concern, and the purchase of physical gold bars and coins comes at a premium 5-15 per cent above gold prices on account of other market markups. These markups plus the 3 per cent GST paid at the time of purchase are unreclaimable.
Gold ETF (Exchange Traded Fund) seems to be the most practical purchase. They are listed on the exchanges and also invest in physical gold. Additionally, investors in gold ETFs do not bear any making charges or premiums.
In India, the increase in gold prices can be attributed to the conflict in the Israel-Hamas region, the potential disruptions in trade with Israel that could happen because of this conflict, and rising crude oil prices. These factors make the gold market a dynamic arena, and thus one should keep a close watch on global and domestic events while making the decision to invest in gold.
The author is a freelance journalist and features writer based out of Delhi. Her main areas of focus are politics, social issues, climate change and lifestyle-related topics. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.