Inflation a key factor in driving short-term gold demand: WGC

A report released by the World Gold Council (WGC) has identified inflation as the strongest factor influencing gold demand in India in the short term. However, in the long term, income rather than inflation becomes the key driver of demand for gold. According to the report, a 1% rise in inflation pushes up gold demand by 2.6%.

“Gold is always known as a hedge against inflation, and it plays the role very effectively, although in certain years, we have seen that this connection could take some time to play out. But any user of gold would have known that gold has protected against inflation. If you look at the price of gold with INR, you will always have seen that it has responded. Between the 1980s and 2020, we have done an analysis, and gold prices have gone up by 14.3% CAGR (compound annual growth rate); so, that is a result of the inflation that we have faced over the years,” said Somasundaram P.R., managing director, India, World Gold Council.

“If we look at how this plays out, it is again a very short-term phenomenon; we have also seen in our study that in the long term, it is more about income which drives the gold demand (because people will feel prosperous, they are looking for investments). But in the short term, inflation counts a lot, because when the value of the rupee is depreciating, you are looking for an asset class that will protect your savings,” he added.

The econometric analysis shows that rising income is the most powerful driver of Indian gold demand in the long term, which bodes well for Indian gold demand as the economy is complemented by a strong demographic dividend, a release issued by the World Gold Council said.

However, Indian demand faces short-term challenges from declining household savings rate and agricultural wages.

It is also impacted by policy measures support which is currently lacking as policymakers view gold demand solely through the prism of imports.

Somasundaram also dismissed concerns about cryptocurrencies acting as a substitute for gold.

“Bitcoin has high volatility. There is nothing physical; it’s not backed by anything. Whereas, gold for centuries has been the currency of the world. And it is still held by central banks,” Somasundaram said.

“ So, the question here is not about bitcoin, but about its volatility; it is speculative nature. If there are investors that believe in some asset class, it can play a role in their portfolio, and absolutely it should, subject to regulatory developments. But what does that do to gold? Just because bitcoin has come, has gold lost its glitter? Not at all, because bitcoin is a risk asset, and gold is traditionally a diversifying asset. It reduces the portfolio risks. Actually, if you have more bitcoin, you should have more gold. That is how we look at it,” he added.