Gold has long been considered the most popular commodity among Indian households. According to a global gold council report, India’s gold demand has witnessed an annual growth of 14% during the July-September quarter at 191.7 tonnes, primarily driven by strong consumer interest. Investors find gold a safer investment option during a downswing or high volatility. Moreover, the World Gold Council has stated that India’s Gold consumption from October to December may decrease by 25% from the previous year, caused due to the impact of inflation on rural demand. From the point of view of an economy, rising gold prices signal an unhealthy economy or an event that investors are anticipating.
Understanding Gold Prices
Gold prices are a significant indicator of a country’s health and are used to predict future events. Let us understand the various factors influencing the prices of the yellow metal.
- Inflation – Individuals prefer holding on to gold rather than currency in case of rising inflation. As a result, higher inflation typically increases gold prices.
- Interest rate trends – Lower interest rates lead to more cash in the hands of individuals leading to higher demand for Gold, which results in increased prices of the yellow metal.
- Government gold reserves – When central banks start holding gold reserves or procuring more gold, the price of the yellow metal goes up.
- International markets – Since India is one of the largest importers of Gold, a change in the import prices leads to a shift in Gold prices in India.
- Jewellery market – India witnesses a spike in buying trends during the wedding and festive seasons, which increases gold prices.
As the price of yellow metal increases, more investors tend to pursue a gold sale to realise maximum profits by searching for good buyers near them.
Impact of Gold on an Economy
Let us understand the impact that Gold can have on an economy.
- Gold Mining – Gold mining can provide significant socio-economic development to India. It helps create direct and indirect employment and helps bring foreign exchange and tax revenues to the country.
- Current Account Deficit (CAD) – Gold imports directly affect India’s current account deficit (CAD). A more extensive CAD for the GDP poses a higher risk for the economy. India is one of the largest importers of Gold, consuming almost one-third of the world’s supply annually.
- Savings – Individuals may be driven to invest in Gold to hedge their savings. As more people invest in Gold, their money gets locked into the investment, which hurts the economy. Since the funds locked in Gold do not go into circulation, they have no contribution.
- Costlier Imports – The government addresses a shortfall in the current account with a rise in the gold import duty. The import tax on Gold is increased to suppress inflows to narrow the trade gap, which increases the cost of Gold and affects the economy.
Gold plays a critical role in influencing an economy. In times of high volatility or plummeting stock market returns, individuals prefer investing in gold or may go for gold sales to get instant profits. Gold is an excellent investment option, and selling gold is a perfect way to restore liquidity. Investors willing to sell their gold must look for buyers to explore the best available options.