By Mahendra Luniya
Indians are obsessed with Gold. But as gold is not found in India, we import most of our gold demand. Gold holds the second position in the Import bill. As most of our Gold is imported, the value is derived through conversion from US Dollar to Indian rupee. So, whatever happens around the globe, it has a significant impact on gold prices.
The uncertainties around the globe have been rising since the Covid 19. The pandemic was followed by supply shocks, then the monetary policy tension and then the Russia-Ukraine crisis. Gold is considered a hedge against inflation, and uncertainties eventually lead to inflation, one way or another. In recent times, there have been two major tensions the world is facing.
Firstly, the banking crisis in America, the interest rates in America have risen quite drastically. The interest rates have risen by almost 5%, from a base of nearly 0%. This is a humongous increase and hence many banks are facing issues in America. This was done to fight inflation which is floating at very high levels in the USA. This inflation along with the fragile condition has boosted gold prices internationally and these problems do not seem to vanish immediately, although the inflation in America is expected to fall but it will take time. Hence these uncertainties are expected to continue boosting gold prices.
Secondly, the Russia-Ukraine crisis. The crisis is one of the main reasons for inflation all over the world. The European and American economies are in a fragile state, first, the inflation was increasing because of war related support provided to Ukraine by Europe and America, and now the situation is worsening. Russia has pushed back out of the grain deal and now the grains from Ukraine are blocked by Russia from reaching the world market. This will lead to sudden food price increases and hence will lead to inflation rising. This inflation, caused because of supply shocks, is expected to remain sticky and there is not much that can be done by countries to stop this inflation.
These uncertainties are expected to either give inflation a boost or at least keep it sticky. Given that inflation and uncertainties are expected to stay, gold will keep attracting investors as it is considered a hedge against inflation. Institutions will be attracted towards gold if uncertainties rise and hence the demand for gold is expected to be high, pushing the prices higher. All these factors will keep the gold prices in the international markets high.
Now let’s analyze the implication of this in relation to prices in Indian markets.
Over the years, the gold prices in India have continued the uptrend as the depreciation in the rupee drives the prices up. The interest rates gap between India and America has been high in past years. It has been on a trajectory of around 4-6%. This has led to the depreciation of the Indian rupee against the US Dollar and that in turn has been a constant support to further the upside in the gold prices.
But in recent times the interest rate difference has narrowed between India and America. This can also be noticed in the exchange rate between US Dollar and Indian Rupee. The exchange rate has been in the same range of around 81-82 rupees for the last 10 months.
Hence, this additional boost might not be available to investors in the Indian markets this time and will cause a negative impact on the gold price. The prices will continue rising if the global prices rise but will rise at a lower rate because the interest rate difference will not act in favor of the uptrend. In conclusion, gold as a commodity is expected to shine with the increase in prices but at a slower pace giving it a little stability.
(Mahendra Luniya is the Chairman of Vighnaharta Gold. Views expressed are the author’s own. Please consult your financial advisor before investing.)