Returns on gold sparkle as rupee loses to US dollar
Gold prices have rallied a lot over the last one year, especially as central banks around the world are going back to printing money to revive their economies. Mint takes a look at the situation
Gold prices have rallied a lot over the last one year, especially as central banks around the world are going back to printing money to revive their economies. However, in the case of India it is a little more than just that. Mint takes a look at the situation.
How much has gold rallied in last one year?
Gold is bought and sold internationally primarily in dollars. Between 1 May 2019 and 30 April 2020, the yellow metal has given a return of 32.6%. As of 30 April, the price of gold was $1,702.80 per troy ounce (one troy ounce equals 31.1g). The reason for this is straightforward. In September, the Federal Reserve of the US started printing money again to drive down interest rates and ensure that the American economy stayed on track. The market was already expecting something like this to happen and, hence, gold prices had started going up a few months before the Fed’s move.
What does this mean in Indian rupee terms?
Data from the Indian Bullion and Jewellers Association shows that gold has given a return of 45.3% over the last one year. As of 30 April, it was priced at ₹45,733 per 10g. This shows that gold returns in rupee terms have been much better than in dollar terms. This is because India produces almost no gold. Between April 2019 and February 2020, the country produced a total of 1,399kg of gold. This means almost all the gold available in India is imported from abroad in dollars. Between April 2019 and January this year, the country imported 632,282kg of the precious metal. This gold is then sold in India in rupees.
How does India buying gold in dollars change things?
The fact that almost all the gold consumed in India is bought abroad brings the dollar-rupee exchange rate into the picture. Over the past two decades, the rupee has depreciated against the US dollar. A major reason for this is higher inflation—the rate of price rise—in India than in the US. This depreciation adds to returns on gold in rupee terms.
What are the near-term gold prospects?
Central banks in western countries are adopting a policy of printing money to finance government budgets as well as reduce interest rates in the aftermath of the covid-19 pandemic. The idea as always is that at lower interest rates people will borrow and spend more, and businesses will borrow and expand. The Fed printed close to $2.5 trillion between 26 February and 29 April, thus expanding its balance sheet by 60%. The money printing is likely to lead more investors to move their savings into gold and push up its price.
How will this pan out in the Indian context?
There is a lot of talk at present about the Reserve Bank of India printing money and helping the government finance its expenditure. If this happens, rating agencies may cut India’s investment rating. This will lead to foreign investors selling both stocks and bonds. As they withdraw their money by selling rupees and buying dollars, the rupee will depreciate more against the dollar. This will mean higher gold returns in rupee terms.
Vivek Kaul is a Mumbai-based economist.
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