Gold Prices touch an all-time high in Indian Markets

For a long time, gold has been a safe haven investment. One of its biggest features has been its normally negative correlation with equity and bond returns. In the last few days, when equity markets have faltered due to the banking crisis following the insolvency of Silicon Valley Bank (SVB) and Signature Bank, gold has pushed up once again. The chart below captures the price of spot gold in the international market over the last 15 years.

Chart Source: Goldprice.org

As can be seen from the above chart, the gold prices have seen a sharp rally on 4 occasions in the last 15 years.

• The first big rally in gold happened in the year 2011, in the aftermath of the global financial crisis and European economies on the brink This led gold all the way up to $1900/oz.

• The second big rally came in the aftermath of the COVID crisis in early to mid-2020, when the COVID pandemic led to an all-round shutdown of business and as equities and bonds cracked sharply, the obvious preference was for gold as a safe haven. In 2020, gold had touched a peak of $2075/oz.

• The third occasion was in March 2022, when the price of gold once again rallied to around $2080/oz due to the Russia Ukraine war. Normally, wars lead to geopolitical risk and that was reflected in gold prices rallying once again to $2050/oz.

• In the latest case, the banking crisis following the collapse of SVB, Signature Bank and the crisis in Credit Suisse led to a massive surge in demand for gold. Gold has briefly touched $2000/oz and is currently trading at around $1976/oz.

Here, gold prices are expressed in terms of Troy Ounce (oz) and typically one troy once is equivalent to 31.104 grams of gold.

But gold prices in India touch a lifetime high

Even as gold prices in the international spot market are still short of the life time highs, Indian gold prices have already risen to an all-time high. During the week, the price of gold touched a fresh lifetime high on the MCX in the aftermath of the US and European banking crises. Gold prices crossed Rs60,000 per 10 grams (the standard benchmark measure in India) for the first time ever. In fact, on Monday, 20th March 2023, the price of MCX Gold Futures rallied by Rs897 or 1.51% to Rs60,280 per 10 grams. Even silver has risen by 0.87% but silver is not just a precious metal, but partly a precious metal and partly an industrial base metal. So, what exactly triggered the Indian gold prices to scale a new high when the global spot gold prices were still short of their peak prices?

While the domestic gold prices are still pegged to the global gold prices, there are two factors that additionally determine the domestic spot gold prices in India. The first factor is the import duty on gold, which is 12.5% plus cess and surcharge, which takes it to about 18%. This has to be added to the benchmark price of spot gold. In addition, the domestic price of gold is also impacted by the rupee dollar exchange rate. To sum up the India gold story, Indian gold price spike can exceed the global gold price spike; either if the duties are increased or if the rupee depreciates versus the dollar. In the last one year, we have seen both these happening, which has pushed Indian gold prices to all-time highs.

But there is also an India demand story emerging in Gold

Indian jewellers see a lot of gold demand in the coming months due to robust economic growth and lower interest rates. The banking crisis may induce the central banks to either cut the interest rates or to hold the rates steady. Low rates are good for gold as it reduces the opportunity cost of holding gold and is normally a big boost to gold demand. Also, the demand for jewellery had been tepid in the last 2 months due to high inflation and recession fears. Now these fears are receding and that is likely to result in revival in gold demand. We could see that happening as early as the second half of 2023. The festival season towards the end of the year would be the real litmus test.

In terms of outlook for gold prices, the global price of gold is expected to scale a life time high of $2,100/oz and that could correspond to Indian gold prices between Rs65,000 to Rs69,000 for 10 grams of gold, assuming some more weakness in the rupee. But above all, the demand for gold is likely to come from safe haven buying. Since the start of 2023, investors are shifting to gold as a means to hedge their equity and bond portfolio from macro and geopolitical risks. The banking crisis is not going away in a hurry and that good news for gold as safe haven demand is likely to come back to this yellow metal. Gold has rallied sharply in the month of March and experts are already of the view that this is just the beginning. Hopefully, gold should have a more positive year in 2023.