Why gold prices are up, what investors should do

Why are gold prices rising?

While prices moved in the range of Rs 48,000 to Rs 52,000 per 10 grams in the first 10 months of 2022, the past three months have witnessed a clear upward trend, in line with rising fears of a recession in some developed markets, and decline in inflation and the consequent slowdown in the pace of interest rate hikes.

While many expect that the US Federal Reserve may even go for a rate cut in 2023, there is a view that demand for gold will rise as people turn to it in times of recession.

In India, in addition to these global factors, prices have risen on account of high domestic demand and the rupee’s decline against the dollar.

“There is a strong demand in the Indian market for gold. While people were postponing their demand during the Covid period, it has been good over the past six months. Also, as the rupee has weakened against the dollar, it increases the landed cost of gold in India, resulting in higher prices. We have seen that as prices go up, demand rises further, as people anticipate more hikes in rates,” said Hareesh V Nair, head of commodity research at Geojit Financial Services.

Will the price rise continue?

Gold is one commodity which has given a sustained appreciation in value year after year, rising by around 88% in the past 10 years. Prices are expected to show an uptrend in the coming years.

Nair said the broad trend for gold prices is positive amid economic and other geopolitical uncertainties.

Also, at a time when fixed deposits are earning below inflation returns and equities have been volatile, many investors see gold as a hedge against inflation. Investors hold 98.21 tonnes of the RBI’s Sovereign Gold Bonds worth Rs 56,296 crore at the current market price. They also hold Rs 21,455 crore in gold exchange-traded funds (ETF) of mutual funds (as of December 2022), according to Association of Mutual Funds in India data.

What should investors do?

Experts feel that investors should keep investing in gold as per their asset allocation and buy on dips for the long term, going for gold ETF and sovereign gold bonds.

Experts are of the opinion that unless gold is purchased for consumption as jewellery, investment should be in paper form, as it is cheaper and takes away the risk of storage. While Gold ETFs are open-ended funds that allow investors to invest without physically holding gold, many prefer RBI’s gold bonds, as they even offer an annual interest of 2.50%.

Financial planners say that gold should form 5-10% of the overall portfolio. Even the RBI holds 785.35 metric tonnes of gold, which is 7.07% of its forex portfolio as of September 2022.

What is gold demand in India like?

Considering the size of the middle class in India, it is not a surprise that 50% of gold demand originates here, as per a World Gold Council report.

In India with its huge population, gold, and specifically gold jewellery, plays a central role, acting both as adornment and investment. In fact, for decades, India was the largest consumer of gold before being overtaken by China in 2009. In 2021, India bought 611 tonnes of gold jewellery, second only to China (673 tonnes) but comfortably ahead of all other gold-consuming markets.

Somasundaram PR, Regional CEO, India, World Gold Council, said, “India is a strong pillar of support for the global gold markets as the second-largest consumer of gold jewellery.”