Will gold prices decrease in coming days 2022?

In today’s Finshots, we dive into whether gold’s role as a hedge against inflation is broken.

The Story

It’s the season of festivities in India.

Dhanteras and Diwali are just around the corner. And there’s one thing that people love to buy during this time-gold!

Now if you look at gold prices in India, you’ll think that the metal is having a pretty decent year. While the stock markets are down nearly 3%, gold prices are up by 5% during the past 12 months.

But here’s the thing. It’s kind of an illusion. it does not reflect what’s happening to gold in the US. Prices have actually dropped by nearly

10%!!!

Wait…how is such a thing even possible?

Well, gold is a bit like oil. Globally, people buy and sell gold using the US dollar. And this means the value of Gold is inextricably tied to the value of the US dollar. So if the value of the dollar appreciates

considerably, then the value of gold could also rise in tandem since it’s denominated in dollars (from an importer’s perspective).

And that’s precisely what’s happening.

dollar. One year ago, £73 would’ve got you $1. Today, you need to pony up nearly ₴83 to get that same $1.

That means importing $55 billion

worth of gold (like we did in 2021) will translate to a higher outgo of Rupees. When it lands on our shores, our import bill will reflect this difference. There’s also the fact that India has increased duties on gold imports from 7.5% to 12.5%. So put together, the weaker Rupee and the import duty have been responsible for pushing domestic gold prices higher.

Which brings us to the big question-why aren’t global gold prices actually rallying? After all, it should be the perfect time to own gold, no? Inflation is through the roof. In some cases,

For starters, there’s the matter of consumption or affordability itself.

Countries that import gold have to cough up a pretty penny because of the dollar’s strength. And that dampens the demand for the metal.

Because at the end of it all, gold is still a luxury that not everyone can afford. So if your domestic economy is not doing that well or when the US dollar rises, you’ll postpone your purchase decision.

That’s why there is a negative relationship between the dollar and gold.

Sidebar: Demand for gold in India still seems to be fairly robust though.

Then there’s the bit about gold investors.

you can make a pretty penny by investing in these bonds as opposed to parking your money in gold.

And with Gold, you also have to work with uncertainty. Yes, the price of gold could appreciate considerably.

But if it doesn’t you’ll be losing money. So in an uncertain environment, people may still prefer

US government bonds over gold.

Also, gold’s role as a hedge against inflation has always been in question.

In the past decade, Indian investors who decided to diversify into gold have made a measly 3.4% a year.

That’s way below inflation.

The only thing going for gold perhaps is the fact that the biggest holders of gold aren’t giving up.

They’re beefing up their reserves and it seems like gold is still the preferred medium for that.

So yeah, we don’t know what’ll happen with gold. But if you have any thoughts, tell us.

Is gold a part of your eternal

Dhanteras wish list or do you think the yellow metal is dead?

Until then…

Happy Diwali 🪔

 

courtesy: Finshot

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