 "gold price")
Domestic prices of gold hit a record high this month of Rs 73,958 ) per 10 grams. They have risen more than 13% in 2024 after rising more than 10% in 2023 as US Treasury yields rise and the US dollar continues to show resilience. Indian gold consumption in the Jan-March quarter rose 8% to 136.6 tons, as investment demand jumped 19% and jewellery demand rose 4% in the quarter, according to the World Gold Council.
While the yellow metal has shown promising short-term performance, with a return of about 20 per cent over the past year, its long-term returns are less impressive. Over a decade, gold has returned around 8 per cent, a figure that pales in comparison to other asset classes such as equities (Sensex), which has returned over 12 per cent in the same period.
Value Research explains why gold has risen 20 per cent in the last year:
Impact of Rupee Depreciation:
Gold is traded globally in US dollars (USD). In India, gold is purchased using Indian rupees (INR). The value of the rupee compared to the dollar has historically fallen over time. This means that even if the price of gold remains stable in USD, it becomes more expensive for Indians to buy in rupees due to the weakening rupee.
"Even as gold returned absolute returns of around 70 per cent in dollar terms over the last five years, it delivered a return of around 105 per cent in rupee terms. To reiterate, this has happened because the rupee has weakened compared to the dollar in the past five years," said Pankaj Nakade of Value Research in a note.
Example:
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Let's say a year ago, 1 USD was equal to 70 INR, and the price of 1 ounce of gold was $1,000 USD.
This would mean 1 ounce of gold would cost 70,000 INR (1,000 USD * 70 INR/USD).
If the rupee weakens to 75 INR per USD in the present, but the gold price remains $1,000 USD, it would now cost 75,000 INR (1,000 USD * 75 INR/USD).
Even though the price of gold in USD hasn't changed, a weaker rupee makes it appear more expensive in INR terms.
2. Anticipation of Rate Cuts:
Interest rates are the fees charged on loans and the returns offered on savings accounts. Generally, when interest rates are high, gold becomes less attractive as investments offering higher interest rates become available. US Federal Reserve, the central bank of the United States, might be planning to reduce interest rates. This anticipation of lower interest rates could make gold a more attractive investment option, leading to a rise in demand and price.
3. Gold as a Hedge:
For For many decades, gold has been known as a dependable store of value. This means its worth tends to remain stable or even increase during periods of economic instability or fear in the financial markets. Gold acts as a "safe haven" for investors because its value often holds steady when other investments become risky. The world is currently experiencing turbulent times due to conflicts like the Russia-Ukraine war and tensions in the Middle East. This uncertainty is driving investors towards gold. People are buying gold because of its historical performance – its value has proven to endure over centuries. Even central banks of some developing countries are increasing their gold reserves, signifying their trust in gold as a reliable asset during uncertain times. Indian gold consumption in the Jan-March quarter rose 8% to 136.6 tons, as investment demand jumped 19% and jewellery demand rose 4% in the quarter, the WGC said.
What should investors do?
Value Research views gold as an unproductive asset class because it relies on market demand for its value increase. "Although the short-term returns of gold might look appealing, historically, it has yielded only 7-8 per cent annually, considerably lower than equity, which has provided around 14 per cent returns (S&P BSE 500) in the last 10 years. That said, some investors may want to add gold to their portfolio. If you are one of them, we suggest you look at sovereign gold bonds (SGBs), and not in any other form, for two key reasons:
While SGB and physical gold prices grow at the same pace, the former offers an additional interest of 2.5 per cent each year.
What's more,if you hold the SGB until its maturity, the gains are tax-free," said Nakade.
If you have a significant amount of money invested, allocating a small portion (around 10%) to gold and silver funds can be a good idea for diversification. But don't expect high returns every year from gold and silver funds. Their main benefit is providing stability and diversification during market fluctuations.
But rising prices are dampening demand:
Gold prices have seen a rapid and significant increase recently. This speed and scale are unprecedented, with prices jumping from Rs 60,000 to Rs 70,000 per 10 grams in just five months (compared to a year for the previous Rs 10,000 increase). This swift rise has reportedly dampened consumer demand, especially for gold jewellery (which accounts for about 75% of total consumption).According to the World Gold Council, consumers are hesitant to buy at such high prices, potentially waiting for prices to stabilize before making new purchases. Typically, a significant portion of gold jewelry purchases are wedding-related, and the current period (April-May) sees fewer weddings.
Restrictions related to elections may further limit gold and cash movement, hindering purchases. While overall demand is down, there's been an increase in physical investment demand (gold bars and coins) driven by expectations of further price hikes. Some jewelers are selling existing stock to capitalize on high prices and invest those profits elsewhere. However, many jewelers face liquidity issues, hindering their ability to restock inventory.
The World Gold Council believes a significant rise in demand is unlikely in the next few months, especially during elections. A potential improvement could occur around Akshaya Tritiya (considered an auspicious occasion for gold purchases) in mid-May if prices stabilize.
