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Gold prices have rebounded a lot in the past year, especially as central banks around the world are reprinting money to revive their economies. However, in the case of India, it is a little more than that. Mint takes a look at the situation.
How much has gold recovered in the last year?
Gold is bought and sold internationally mainly in dollars. Between May 1, 2019 and April 30, 2020, the yellow metal returned 32.6%. As of April 30, the price of gold was $ 1,702.80 per troy ounce (one troy ounce equals 31.1 g). The reason for this is simple. In September, the US Federal Reserve. USA He started printing money again to cut interest rates and ensure the American economy stayed on track. The market was already expecting something like this to happen and therefore gold prices had started to rise a few months before the Fed move.
What does this mean in terms of Indian rupees?
Data from the Indian Bullion and Jewelers Association show that gold has returned 45.3% in the past year. As of April 30, it was priced at ₹45,733 per 10g. This shows that gold returns in terms of rupees have been much better than in terms of dollars. This is because India produces almost no gold. Between April 2019 and February 2020, the country produced a total of 1,399 kg of gold. This means that almost all the gold available in India is imported from abroad in dollars. Between April 2019 and January this year, the country imported 632,282 kg of the precious metal. This gold is sold in India in rupees.
How does buying gold in dollars change things?
The fact that almost all the gold consumed in India is bought abroad highlights the dollar-rupee exchange rate. In the past two decades, the rupee has depreciated against the US dollar. An important reason for this is higher inflation (the rate of increase in prices) in India than in the United States. This depreciation is in addition to gold yields in terms of rupees.
What are the short-term gold prospects?
Central banks in western countries are adopting a policy of printing money to finance government budgets and reduce interest rates after the covid-19 pandemic. The idea, as always, is that at lower interest rates people will borrow and spend more, and companies will borrow and expand. The Fed printed about $ 2.5 trillion between February 26 and April 29, thereby expanding its balance sheet by 60%. Printing money is likely to lead more investors to shift their savings to gold and increase its price.
How will this work in the Indian context?
There is much talk these days about the Reserve Bank of India printing money and helping the government finance its spending. If this happens, rating agencies can lower India’s investment rating. This will lead foreign investors to sell stocks and bonds. As you withdraw your money by selling rupees and buying dollars, the rupee will depreciate further against the dollar. This will mean higher gold yields in terms of rupees.
Vivek Kaul is an economist based in Mumbai.
