Before we start understanding why gold prices are rising let’s have a quick look at the facts about the Gold in India,

-India in the past had the glory of being called GOLDEN BIRD (Sone ki Chiddiya)

-Rate of gold at the time of Independence Year 1949 and as on Year 2020

Year Rate/10Gms (in Rs.)
1949 88.62
2020 (06th May) 45,864/-

   * Rate of gold touched a high of Rs.46,785/- on 15th April 2020.

-India is the world’s largest importer of gold with an annual consumption of 800-900 tonnes. (1 tonne = 1000 kg).

-Indians household have an accumulated gold of approx. 25000 tonnes (personal use).

-Central Bank of India (RBI) holds about 635 tonnes (as on January 2020) of gold as reserves. (India has 9th Largest Reserves in the world).

-Gold import amounts to about 6% of the total imports done by India.

So, the next question is why the Demand for gold increased all off sudden leading to skyrocketing price?

Gold prices does not fluctuate much when the world economy and  GDP is growing because investors all over the globe have multiple investment options like investment in bonds ,equities ,fixed deposit etc. yielding higher return on invested amount and investors don’t find investing in gold that lucrative. When the world economy is about to step into recession gold prices start increasing. Why So, Let’s understand by a flow chart.

Economic Growing phase

*GDP (Gross Domestic Product) keeps on increasing means economy is growing and falling GDP means economy nearing recession.

Let us understand why Investors invest only in Gold and no other Commodity or Security?

One of the major reason for investment in gold during recession is Central Bank (RBI) introduce more of liquidity in market by buying bonds and also by decreasing the REPO rate ( rate at which RBI lends money to banks) thus decreasing the interest rate of borrowing from Banks by public.

Since the lending rate is reduced by banks to assist the falling economy, Interest rate on deposits is also reduced yielding lower return on investment and investors finding potential in gold. As there is more liquidity in economy purchasing power increases leading to inflation, thus lowering the purchasing power of the currency.

Let’s have a look at the Characteristics of Gold that makes it attractive for the investors,

  • Gold is a commodity and has its natural value, also scare in nature, so supply is limited in quantity thus increasing its price whenever there is demand for it.
  • Gold is a very liquid investment because universally traded on different stock exchanges all over the world.
  • Prices of gold are independent, Irrespective of revenues and profits of any Company.
  • Also accepted as a collateral by bank for granting loans
  • Gold cannot be created or printed at the discretion of Central Bank.

All the above merits make gold a better option for investment during recession for the investors.

Going back into the history whenever there is economic distress or recession, gold prices have surged drastically since more of the investors want to park their funds in safe haven instead of keeping the funds idle and earning no income.

Author Bio

Qualification: CA in Practice
Company: Dangi Gupta and Associates
Location: Mumbai, Maharashtra, IN
Member Since: 04 May 2020 | Total Posts: 2

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February 2021