Fluctuation in Gold Prices Post-Diwali: Insights for Investors

After seeing an all-time high of Rs79,362 for 10gms of gold, on 30th Oct; suddenly the prices are on a rollercoaster ride. This analysis explores the fluctuations in gold prices in India post-Diwali, offering insights into what investors should anticipate and evaluating gold's current viability as a hedge.

Global Factors Influencing Gold Prices

1.     Geopolitical Factors: Gold is often considered a safe-haven asset during times of economic instability. With ongoing geopolitical tensions at Gaza and Ukraine; the demand for gold may remain resilient.

2.     Interest Rate Policies: The U.S. Federal Reserve’s interest rate hikes, which strengthen the U.S. dollar and raise bond yields, often reduce the appeal of non-yielding assets like gold.

3.     Chinese and European Demand: China, as the world’s largest gold consumer, plays a pivotal role in setting international demand trends. Similarly, European investors often turn to gold during periods of eurozone economic stress.

4.     Trump as President Elect: Donald Trump has announced intentions to levy extra import duties on China, Mexico and Canada. His upcoming presidency is raising a lot doubts and hopes in equal measures. 

Domestic Factors Driving Gold Prices in India

1.     Rupee-Dollar Exchange Rate: Since India imports most of its gold, the rupee's value against the dollar significantly influences prices. A depreciating rupee makes gold imports costlier, irrespective of global price trends.

2.     Customs and GST Policies: A change in import duties or GST rates on gold can directly affect prices. Like the reduction in import duty of gold from 15% to 6%  in  July this year has led to change in trend of gold prices.

3.     Demand Patterns: India’s love affair with gold remains steady, but demand dynamics are evolving. Urban buyers are increasingly investing in gold ETFs and digital gold.

Is Gold Still a Good Hedge?

Gold has historically been considered a reliable hedge against inflation, currency depreciation, and economic uncertainty. Let’s analyze if this still holds true in today’s context.

Advantages:

1.     Inflation Protection: Amid persistent inflationary trends globally, it remains a favoured asset for wealth preservation.

2.     Currency Hedge: A depreciating rupee makes gold an attractive store of value, especially in an import-reliant economy like India.

3.     Portfolio Diversification: Gold’s negative or low correlation with equities and bonds makes it a valuable component of a diversified portfolio, reducing overall portfolio risk.

Challenges:

1.     Volatility: Short-term price volatility can deter investors who are not able to stay invested as the markets shift.

2.     Competing Investments: Rising interest rates and the strengthening of the U.S. dollar often reduce gold’s appeal compared to bonds and treasury securities.

3.     Storage Costs: Physical gold entails storage and insurance costs.

Investment Strategies for Investors :

1.     Systematic Investment: Volatility in gold prices makes a case for systematic investment plans (SIPs) in digital gold or mutual funds. This allows investors to average out costs over time.

2.     Diversification: Allocate a portion (10-15%) of your investment portfolio to gold. This ensures protection against market downturns without over-reliance on the asset.

3.     Preference for Digital Gold: Instead of physical gold, consider gold ETFs or digital gold platforms, which eliminate storage issues.

4.     Monitor Global Trends: Keep an eye on U.S. Federal Reserve policies, global geopolitical developments and domestic currency movements for clues on better investment timing.

To sum up, even though gold prices have fallen by 8% since the end of October, it remains one of the best-performing assets this year, with a year to date return of 17% for the Indian market. Hence, undoubtedly it is a good investment hedge specially if one does a regular SIP in Digital Gold.

Sources: Moneycontrol, Economic Times, Business Today, World gold council