In the realm of wealth and investment, gold’s allure is tempered by risks and complexities, echoing the cautionary tale of King Midas
Suresh Chandra Sarangi
The story of Midas is awe-inspiring to all of us. Midas asked God to bless him with the power so that whatever he touched would be converted to gold. Then, on his way home and in his garden, whatever he touched immediately became gold. Midas was rejoicing in his newfound power and then touched his plate of rice, and it turned gold. That was bizarre. Midas realized the fault in his prayers. Anybody who possesses gold and does not have an ounce of gold faces the same problem.
Gold is a fantastic asset class, but at the same time, the security concerns it espouses are understandably disturbing and crazy. Along with that, the price fluctuation is very quick and thus, it is the cynosure of modern man. There have been many films taking into consideration the greed for gold and the consequent suffering of the gold rush. Of late, the modern man has been very much interested in gold and his fascination with this asset class and investment product is not without reason. Gold was the craze of the time.
The recent surge in the price of gold has disrupted household budgets as well as the economies of nations. Once upon a time, the gold standard, as a monetary system where a country’s currency is valued on a fixed amount of gold, was the order of the day. But with time, the same has changed.
Storehouse of Value
Gold prices have reached new heights. It soared in the last few years and touched Rs. 84900/ in India. The volatility in the equity market prompts people to flock around gold in search of greener pastures. Some pundits predict that it will soar high, and others feel that gold is headed for a free fall. At other centers like the USA, gold reached US$2250 per ounce, driven by inflationary concerns. The fact remains that central banks are increasing interest rates to tame inflation. Hence, gold has remained a storehouse of value.
This gold has lagged behind the standard and poor 500 recently. Now it appears that the gold rate will touch a new high. It almost reached the US$2080 levels in the International market, whereas in India’s MCX, it is facing resistance. In the past few months, it has been said that gold prices are rising because of the weakness in the US dollar. However, as of late, gold seems to be heading further North. So, it would be better to analyze the rally in gold prices. Suddenly, it is in high demand with households and central banks due to the uncertainty in the international market.
Gold prices have increased since 1922, and in 2024, it has increased by over 15%. This is almost on a growing trajectory, and it has been experienced that whenever there is geopolitical instability, gold prices tend to grow. Since 2022, the increase in the price of gold has upset household budgets. World Gold Council captures the prices. Prices were 2000 per dollar per ounce on April 23, and they went up to 2400 US dollars in the last three months. As of now, one of the foremost reasons for the rise in gold prices has been the purchasing of gold by almost all central banks on account of geopolitical instability.
Demand & Supply
The composition of foreign exchange reserves has the following factors: gold reserves, foreign currency assets, the SDF of IMF, and some special drawing land. China has been purchasing gold for the last two years. The People’s Republic Bank of China has been purchasing it without a break. It has accumulated more than 2000 tons.
Other Central banks that are on a gold buying spree are the Turkey Central Bank, Indian Reserve Bank, Russia, and others also do it for portfolio diversification. The supply of gold is finite and the demand is outstripping supply, and that is one of the pivotal factors for an increase in gold prices in India. During 2024, the foreign exchange reserve was growing, and so was the share of gold in its reserves.
The Dollar index is also increasing. There has been a huge fluctuation in the value of the Rupee vs the dollar, where the dollar is gaining and the rupee’s value is depreciating. To pop up Rupee’s value, the RBI has been constantly intervening in the market. Out of the two main compositions within the reserve of foreign exchange is one foreign currency asset and two that too in different currencies. To obviate the fluctuation, RBI has been buying gold to diversify its portfolio. Moreover, Gold is an important hedge against inflation. When inflation is higher, the interest will go up.
The bond yield will be higher. When bond yield is higher, the bond prices fall due to the inverse relationship. Therefore, when there is volatility on currency fluctuation, central banks try to mop up gold. Here gold works as a safe inflation weapon and thus, the trend is to purchase more gold. Gold, as per experience has been continuously beating inflation.
The behavior of people is very funny as well. In India, gold has a cultural value linked with marriage, and during Akshaya Trutia, people purchase gold as it is an auspicious symbol to purchase and preserve gold on that day. In certain geography including the Southern state during childbirth also people clamor for gold and in populous countries like China or India when demand outstrips supply gold prices tend to increase.
China has been at the forefront of buying for the last two years when its real estate market was crumbling and the economy was on the backfoot to obviate this uncertainty, they were in a buying spree of gold, which helped indirectly towards the growth of prices of gold in India, in 2023, China was the biggest consumer of gold. Speculation says that gold will touch Rs 2 lacs in the next 6 to 7 years.
Therefore, the increase in gold prices was a factor of fluctuation, and in India, our impatience prompts us to buy gold, and in turn, prices increase. Of late, there has been a behavioral shift in India and now they are more inclined to shift from financial assets to physical assets, more particularly gold has worked at fantastic security in banks and gold loans are on the increase. When people know that there is the facility of such security and the bankers are convinced, it indirectly facilitates gold prices.
Gold ETF
Recently, gold ETFs have been in more craze as they guarantee better liquidity than physical gold. To ease the pressure on gold prices, in the 2024-25 budget, the government decreased the customs duties on gold from 15% to 6%. The government has established SEBI-regulated gold exchanges. The government has adopted a commodity market for gold. The government initiated steps for the hallmarking of gold ornaments with the help of the Bureau of Standards. These steps by the government ensure that gold becomes affordable for the citizens of India.
The Reserve Bank of India had previously banned the import of gold and gold coins and medallions in 2013. But in the aftermath, it lifted the ban. The RBI had put restrictions on banks on selling gold coins and medallions. Then came the 80:20 scheme. This scheme required that 20% of every lot of gold imported be made available for exports. Thereafter, again, the government allowed the RBI to import gold without paying levies. The gold importers are required to pay basic customs duty and Agriculture infrastructure development cess.
The sovereign gold bond scheme was rolled out, and they are government securities denominated in grams of gold. They are a substitute for holding gold in physical form. In this scheme, the investor pays the issue price, and the bond gets redeemed on maturity. This bond is issued by the Reserve Bank of India on behalf of the government of India. As they are tax-free investments and are a good destination for investment. This is, to some extent, easing the pressure on buying physical gold. The plans to cut customs duty on gold may be under consideration.
The World Gold Council recently said that market reactions are a response to trade uncertainty. It further said that one of the reasons for gold’s price performance could be attributed to the momentum of gold. It has driven a significant shift in trading behavior and impacted gold prices. Its analysis thinks that it had been supported by flight to quality flows amidst increased market volatility, driven by geo-strategic concerns arising out of geopolitics and geo-economic concerns.
All said and done all that glitters is gold, its lustre continues to attract one and all, which accelerate the price momentum. Any increase in the prices of gold would further exacerbate the pulses of people and it is here the government has to steep in with appropriate policy choices, so that the yellow metal cools down for now.
(The writer is a former General Manager of Bank of India and currently a visiting professor at KIIT School of Management. Views expressed are personal.)
