Increase in Gold Prices

• 24 Jul 2020

Why in News

Recently, the gold prices crossed Rs. 50,000 per 10 grams after nine years in India.

• Gold prices in India are dictated by international prices. India is the world’s second-largest gold consumer after China.

Key Points

• Reasons:
  
  • Global uncertainties triggered by Covid-19 pandemic, weak dollar, low-interest rates environment and stimulus programmes have increased the demand for gold.
  • Rising virus cases and USA-China tensions have also led to increase in the gold price.
• Gold as Safe Haven:
  
  • Whenever stock markets, real estate and bonds fall across the world, investors turn to gold to park their funds. It is considered as a safe haven for investors during periods of uncertainties.
  • As gold is highly liquid and carries no default risk. It is scarce which has historically preserved its value over time.
    
    • Liquidity describes the degree to which an asset can be quickly bought or sold.
  • Further, supply growth of gold has changed little over time, in contrast to fiat money (paper currency), which can be printed in unlimited quantities to support monetary policy.
  • Gold is an integral part of wedding ceremonies in India. It is traditionally used as a hedge against inflation.
    
    • Global economies are considering stimulus to boost growth which may lead to increase in inflation further.
• Return on Gold:
  
  • Historically, gold has generated long-term positive returns.
    
    • The price of gold has increased by an average 14.1% per annum since 1973 after Bretton Woods collapsed and the gold standard system of pegging the currency to gold ended.
      
      • Bretton Woods System was a fixed exchange rate system, under which gold was the basis for the US dollar and other currencies were pegged to the US dollar’s value.
  • Gold has surged nearly 40% in the last one year while the Sensex (benchmark index of Bombay Stock Exchange) showed a loss of 0.41% in the same period.
• India’s Gold Market:
  
  • According to the World Gold Council (WGC), households in India may have around 24,000-25,000 tonnes of gold. Various temples across the country also hold sizable gold holdings.
  • The Reserve Bank of India bought 40.45 tonnes of gold in the financial year 2019-20, taking its total holdings of the gold to 653.01 tonnes.
    
    • It is a part of RBI’s forex reserves.
  • India’s gold demand in 2019 was 690.4 tonnes compared to 760.4 tonnes in 2018.
    
    • The demand has reduced in 2020 due to lockdown caused by pandemic.
  • Around 120-200 tonnes of gold are estimated to be smuggled into India every year.

Source: IE