Why gold prices are up 20% this year in India3 min read . Updated: 12 Aug 2019, 05:30 PM IST
- Many analysts see further upside in gold prices
- Funds are shifting to safe-haven assets like bonds and gold: Analysts
Gold prices this year have seen a spectacular rally this year, rising to record highs. Gold futures prices are up from around ₹31,500 per 10 grams at the start of the year to the current levels of around ₹38,000 in India, a gain of around 20% in eight months. In spot markets, gold prices have hit a new high of ₹38,470 per 10 grams. As India imports most its gold requirement, domestic prices are driven by global rates, rupee-dollar exchange rate and import duty. In global markets, gold prices have also seen a massive gain and are hovering around a six-year high of $1,500 an ounce as investors piled into safe-haven assets amid a global slowdown, dovish stance from global central banks and a US-China trade war.
Here are five reasons why gold prices are up sharply this year
1) The escalation in trade war between the US and China has triggered a strong rally in gold prices this year. Despite multiple rounds of negotiations, the world’s two biggest economies have failed to make any headway. US President Donald Trump last week said he was not ready to make a deal with China and even called the September round of trade talks into question. Also, last week, the US also accused China of being a currency manipulator after Beijing allowed the yuan to slip below 7 to the dollar. Despite the sharp gains in gold price this year, analysts from Goldman Sachs to Citigroup remain bullish on the metal, expecting further upside. Gold prices had hit an all-time record of $1,921 in 2011.
2) Back in India, the government in this year's July Budget had increased the import duty on gold to 12.5% from 10% earlier. Back in 2013, India had hiked import duty on gold for a third time to 10%. Import duty increased the landed cost of gold in India as most of the gold is imported.
3) Lingering US-China trade war has led many analysts expect that the US Federal Reserve could further lower interest rates later this year. On July 31, the Fed cut its target interest rate by 25 basis points to 2-2.25%, citing implications of global developments for the US economic outlook and muted inflation pressures. US President Donald Trump has also called for sharp rate cut, saying the nation's economy was being "handcuffed" by the US central bank's monetary policy. The appeal of non-interest yielding assets like gold increases when interest rates go down. The dovish polices pursued by major global central banks have pushed the yields of about $15 trillion of debt globally into negative territory, further boosting the appeal of gold.
4) The IMF in its latest forecast warned that further US-China tariffs or a disorderly exit for Britain from the European Union could further slow growth, weaken investment and disrupt supply chains. Data last week showed the British economy unexpectedly shrank for the first time since 2012 in the second quarter, while German industrial production suffered its biggest annual decline in nine years. Global slowdown fears have pushed the holdings in global gold exchange-traded funds backed by the metal to the highest since March 2013, Bloomberg reported. Gold is traditionally seen as a safe investment in uncertain times. Looser monetary policy drags down bond yields, making non-yielding gold more attractive.
5) Buying by global central banks has also supported gold prices. The World Gold Council said central banks bought 224.4 tonnes of gold in the second quarter, taking their purchases to 374 tonnes over the first half. That was up from 238 tonnes in 2018.
“Gold prices have surged, capitalising on the wave of global central bank easing, surging market value of negative bond yields and strong fund buying. Experts reckon an outside chance of prices getting to $1,600 given the persistent trade tensions and instability in Hong Kong," Yes Securities said in a note.
Vinod Nair, head of research at Geojit Financial Services, said: "In the last one-month Nifty50 has corrected by around 4%. One of key reason it can be associated with is the aggressive selling by FPIs. This was due to slowdown in the global economy, the last quarter GDP of important countries like US, Euro areas, China and India has been muted. As a result, equity is loosening its attractiveness as an investment class and funds are shifting to safe-haven assets like bonds and gold."