Why gold prices are skyrocketing in India
What's the story
Gold prices in India have surged to near-record levels, with MCX's most active August futures hitting ₹100,555 per 10gm last week. The spike is not just a domestic issue but a result of global market dynamics and currency fluctuations. The rise in gold prices is mainly due to geopolitical tensions, central bank buying, and investor demand for safe-haven assets.
Market correlation
Global trends and currency impact
The global gold market has been on a strong upward trend. This rise directly impacts Indian gold prices, which closely follow international trends. However, the effect is amplified by the exchange rate. The Indian rupee (INR)'s depreciation against the US dollar over recent years has made gold imports costlier and pushed up domestic prices further.
Consumption trends
India, China drive global demand
India and China together account for over half of the world's gold consumption. In India, demand has remained resilient despite high prices, especially in rural areas where gold is traditionally valued.However, the nature of demand is changing with jewelers reporting a shift toward lighter jewelry and gold coins as consumers adjust to higher prices.
Strategic importance
Safe-haven asset amid global uncertainties
Gold's status as a safe-haven asset has grown amid global uncertainties like the Russia-Ukraine conflict, tensions in the South China Sea, and instability in the Middle East. Central banks, including the Reserve Bank of India (RBI), have continued to add gold to their reserves. The recent rhetoric from US President Donald Trump proposing tariffs on several countries has further fueled fears of a global trade war, driving investors toward gold as protection against economic disruption and inflation.
Demand forecast
Demand expected to remain strong
Looking ahead, upcoming festivals like Diwali and Dussehra are expected to drive up gold demand in India. Weddings, another major driver of gold purchases, are also likely to increase in the latter half of the year. A normal monsoon season could boost agricultural incomes and rural gold buying as well. Despite high prices possibly deterring some retail buyers, gold's enduring appeal as a hedge against uncertainty ensures robust demand.