The global demand for gold in 2019 has grown, pushing the prices to the highest point for the last six years. One of the major driving forces for this is India’s and China’s demand for the precious metal. Are there other factors that affect the gold prices in India apart from demand?
As an example, India’s demand for gold jewelry was at a four year high in early 2019 at 125.4 tones. India, with its population of over 1.25 billion people, is the world’s second-largest consumer of gold. Consequently, the economists view the demand for gold in India as a reliable driver of the global market. Only China can rival India’s love for gold is, consuming a whopping 984 metric tons of gold per year.
Demand for gold in India is entwined with its culture and traditions, the desire for beauty, and financial protection. According to World Gold Council research, Indians view gold both as an investment and a decoration.
There’s no one specific factor that perfectly encompasses the uncertainty that can move gold. The stock market strives for certainty, and it often stagnates gold prices. Absence of knowledge of how Brexit will turn out for the UK and the whole of Europe, who’ll be the 45th president in the USA, and if terrorist threats in the Mideast are the factors contributing to global growth uncertainty and thus to gold prices growth.
Recently, gold prices have grown as recession fears boosted. Following weak manufacturing data, it has increased the demand for the safe-haven metal.
Indian securities brokerage company IndiaNivesh has evaluated the current situation with gold this way:
The escalating trade war, Brexit worries, civil unrest in Hong Kong, weakness in the rupee and weaker than expected US manufacturing PMI numbers of August boosted safe-haven buying of the precious metals.
Gold has often been a hedge against inflation since gold prices tend to rise while the stock market falls during high-inflation times. The theory behind it is like this: after fiat loses its purchasing power to inflation and then starts going up again, gold rises along with it. Moreover, since investors regard gold as a good store of value, they want to buy it when they expect their local currency to lose value.
Deflation is a period when the prices decrease, business activity slows, and there is excessive economic debt. The most well-known example was the Great Depression of the 1930s. During the Great Depression, the relative purchasing power of gold towered while other prices dropped dramatically. This happened because people preferred to accumulate cash, and the safest place to hold was in gold.
The rupee-dollar correlation plays an important role in gold prices in India, although it doesn’t impact world gold prices. Indians largely import gold, and hence, if the rupee weakens against the dollar, gold prices are likely to grow in rupee terms. So, a depreciating rupee may dent the demand for gold in the country.
Under normal circumstances, gold and dollar have an inverse relationship. Since gold is dollar-denominated, any weakness in the dollar pushes up gold prices and vice versa. At first, the falling value of the dollar increases the price of other currencies, which in turn increases the demand for commodities, including gold. It also increases prices. Secondly, when the US dollar starts losing its value, investors are likely to protect their funds, turning to gold as a safe-haven asset.
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