The yellow metal continues to shine bright in February after witnessing a record surge in prices last month. In fact, 24-carat gold was trading at an all-time high of ₹58,826 per 10 grams on the Multi Commodity Exchange (MCX) on February 2.
Moreover, the gold price was increased by ₹1,050 in a single day when the Finance Minister presented the Union Budget in the parliament. In international markets too, the exchange rate of spot gold was pegged at $1,951.79 per ounce, the highest since April last year.
Although the gold prices have come down to ₹56,160 per 10 grams as of mid-February, experts believe that gold prices will achieve new heights during this quarter. There are numerous factors that are driving gold rates to an all-time high.
Read on to why the gold price has continued to see a spike in 2023.
Reasons Behind the Rally in Gold Prices
Gold continued to glitter last year as volatility took hold of domestic and international markets. Investors sat on hefty gains, especially those who invested last year. Gold returns have paid off returns of almost 4% in January 2023 and 6% and 3% in November and December 2022, respectively.
Here are deeper insights on factors that have made gold prices rally by 12% in the recent years.
Interest Hike by the Central Banks
Interest rates and gold prices are inversely related, which means when interest rates are hiked, gold prices plunge and vice versa. This is because when interest rates are high, bank deposits, securities, and bonds are more attractive investment options for investors.
This causes a decline in demand for this precious metal and a relative fall in its prices. Now that inflation has begun to subside in India and the USA, central banks are under pressure to ease the restraint of interest rates. This would support the gold rates in the coming months as the inflation rate in the US witnessed a year-on-year decline of 1.1%.
Depreciation in the US Dollar Value
Investors use gold as a hedge against currency fluctuations; thus, the US Dollar’s value plays a vital role in determining gold rates. When the US Dollar is stronger, exchange rates are impacted, driving demands down. As a result, the gold price falls.
However, with an expectation of softening in interest rate hikes, the dollar index has been falling since December. In fact, the value of the US Dollar came down to an eight-month low against six major currencies in December. This would only support a further hike in gold prices.
Geopolitical factors like wars, conflicts, and political instability also impact gold prices. Therefore, investors tend to buy gold as a hedge when there is volatility in the market. In times of uncertainty, investors sell riskier assets like bonds and stock and move towards gold.
This triggers gold prices to hike. Moreover, wars and conflicts can cause disruptions in supply chains, causing an increase in the gold price.
Recession is yet another factor that majorly influences gold rates. A recession is marked by grave economic uncertainty, job losses, and declined financial activity. In such a scenario, investors lose trust in traditional investment instruments like bonds, stocks, and securities.
Instead, they prefer to buy gold as a security hedge, leading to increased demand and higher prices. As economists claim that there is a 7-in-10 likelihood of a recession in 2023, gold prices may increase further in the months to come.
Hike in Import Duty
When the import duty on gold increases, the price of this yellow metal also goes up. As a result, the supply declines over time because it becomes expensive for gold traders to
import this metal.
The Government of India raised the import duty on gold by 4.25% in July last year. This decision had a notable impact on gold prices in the country.
What Investors Must do
Gold acts as an important addition to any portfolio, especially if you are looking to diversify. Moreover, you qualify for a gold loan, and any appreciations in value work in your favour. Authorised lenders generally provide a gold loan of almost 80-90% of the metal’s worth.
The yellow metal has a negative historical correlation with other investment assets. It means that the gold price generally goes up when investments like bonds and stocks fail to perform.
Given the current situation of the global economy, the gold price may see a record height in the months to follow. Gold had a CAGR of 12% in the last three months, whereas an FD provides you with a maximum interest of 8%.
Owing to global events, the prices may witness volatility, but they are set to rise in the long term. So, this could be the right time to invest in gold.
Also Read: Things to Consider Before Taking a Gold Loan
Where to Invest
Apart from investing in physical gold, you also have the choice to invest in gold mutual funds, gold ETFs, or Sovereign Gold Bonds (SGB). Gold ETFs may be a preferred option for you if you are planning to gain short-term advantages by banking on its volatility.
However, if you plan to invest in gold for the long term, you may consider investing in Sovereign Gold Bonds. These bonds rarely trade near the prevailing gold prices. You must also consider when to enter and exit when trading in gold.
Now may be a good time to invest as gold prices may rise this year. However, global events may shape a different picture next year. Therefore, a timely exit would ensure higher gains in your investment.
Investments in SGBs are locked in for eight years, and you cannot exit before the maturity period. But if you are invested in ETFs and gold bonds, you may look at the exit for earning higher returns.
In conclusion, gold’s price has a high potential to rise in the months to follow owing to shifting economic and political climates. So, this could be your cue to invest in this precious metal.