Gold prices rally despite a strong dollar

Against the backdrop of escalating global instability, central banks worldwide, including the Reserve Bank of India, are prioritizing the augmentation of their gold reserves. Consequently, this has contributed to a rise in gold prices on the global market. India’s heightened gold acquisitions have resulted in a noteworthy surge of US$ 3 billion in forex reserves, now standing at US$ 648.5 billion. 

The escalating tensions between Iran and Israel, the ongoing conflict in Russia and Ukraine, rising demand in China, and the surge in consumer demand collectively serve as additional catalysts for the global upsurge in gold prices despite dollar reaching record highs. As we witness this upward trajectory, let’s delve deeper into the driving forces behind its ascent.

Image Credit: Pixabay

Gold holds immense cultural, social, and economic significance in India. Revered as a symbol of wealth, prosperity, and auspiciousness, it is deeply ingrained in religious ceremonies, weddings, and festivals. Beyond its ornamental value, gold is viewed as a traditional and stable form of investment and savings, often considered a hedge against inflation.

In response to fluctuations in the US dollar, it seems that the same emotion has gripped central banks worldwide. The Reserve Bank of India is no exception, as it has escalated its gold acquisitions to bolster the diversity of its foreign exchange reserves. The considerable uptick in the value of outstanding gold reserves contributed over 80% to the nearly US$ 3 billion upsurge in forex reserves, which soared to a historic high of US$ 648.5 billion as of April 5.

Between January and February 2024, the RBI procured 0.43 million troy ounces, roughly equivalent to around 13.3 tonnes of gold, from the market. This acquisition surpasses over 80% of the total gold purchases made by the central bank in 2023, which amounted to 0.52 million troy ounces. With the RBI’s increased gold acquisitions, it may facilitate cheaper gold imports, potentially boosting domestic supply and exerting downward pressure on prices in the future.

Although RBI is focusing on purchasing gold, the precious metal has been experiencing a significant jump in prices due to various ongoing global tensions. As of 22nd April, the price for 10 grams of 24k gold are as shown in the graph below.

Prices of gold across cities in India 

Source: goodreturns.in; prices are for 24 carat gold per 10 gms

India has observed a growth of 30.1% YoY in gold imports FY 2023-24. But according to the latest trade data for the month of March 2024, the country has observed a sharp drop of 53.6% in gold imports YoY, which is one of the contributing factors of sky rocketing gold prices in the country.

Reasons for price hike

The price surge of gold is attributed to a multitude of factors, including:

• Geopolitical events: The ongoing Israel-Iran tensions have sparked a surge in prices of precious metals due to safe haven demands globally, despite the dollar index showing strength.
• Central Bank policies: A strong buying trend has been observed, particularly in China where consumers have been loading up on the metal amid ongoing problems. The country’s central bank has added substantial volumes of bullion to its reserves, boosting holdings in each of the past 16 months.
• Strength of the US Dollar: Gold prices typically move inversely to the value of the US dollar, since gold is priced in dollars. When the dollar strengthens, gold prices tend to remain lower due to decreased demand. Conversely, a weaker dollar often drives up gold prices as it increases demand, allowing more gold to be bought with the same amount of currency. However, the current trend is a marked departure, considering that dollar and gold prices are trending in the same direction. Analyst Chris Wood of Jeffries states in his analysis that the only plausible explanation for the rally is the demand from China, though enough data is not available for this.
• Jewellery and Industrial demand: The prices of gold are significantly influenced by demand in both local and international markets. In recent years, the purchasing power of Indian households has seen an increase. Factors such as heightened demand during festivals like Gudi Parva (April 9), Akshay Tritya, and wedding seasons contribute to the upward surge in gold prices.

Source: goodreturns.in, Prices are for 24 carat gold per 10 gms

Commenting on the current gold scenario in India, Vipul Shah, Chairman of Gems and Jewellery Export Promotion Council states:

“The escalation of global geopolitical tensions is the primary driver behind the increasing gold prices worldwide, as the precious metal is sought after as a safe haven asset. Additionally, numerous countries are shifting their focus from holding dollar reserves to augmenting their gold reserves. Furthermore, there has been a notable surge in consumer demand for gold globally, further contributing to the price hike. Depending on the geopolitical landscape, we can anticipate gold prices to stabilize in the future.”

The increase in gold prices in India stems from a mix of global and local factors. Geopolitical tensions, central bank actions like China’s gold acquisitions, and the fluctuating US dollar all play a role. Despite short-term fluctuations due to India’s gold imports, the long-term trajectory reflects the enduring appeal and resilience of gold as a valuable asset in India’s cultural and economic landscape. However, it is expected that prices will settle down and stabilise in the coming days if geopolitical tensions ease.