Gold at ₹77,000: Opportunity or Red Flag?

Learn Everything About Gold's Rise and What It Means for You

Oct 03, 2024

Gold is trading at 77,000 INR per 10 grams, a record high both domestically and internationally.

Two years ago, in October 2022, it was trading at approximately 51,000 INR per 10 grams, which is an increase of almost 50% from that level.

Gold prices are often seen as a barometer of economic health. A 50% rise in two years isn't just a market irregularity; it could indicate deeper shifts in global financial stability.

In a situation like this, several questions come to mind for different groups of people:

Investors:
Is it a good time to invest in gold, or is the price too high or should I sell my gold holdings to take advantage of the current prices?
Consumers:
For the upcoming marriage season, should I buy gold now itself or wait for it to come down?
Traders:
For short-term gains, should I take a long position to capitalize on the trend, or is it time to say enough is enough and short gold futures?
Economists and Analysts:
How will fluctuations in gold prices affect the global economy, markets, and currency values in the coming days?
Central Banks and Governments:
Should we consider increasing our gold reserves to hedge against economic instability?

But I’m writing this newsletter for you – someone who values building a deep understanding of finance topic and knows that true knowledge is the real gold.

Your curiosity and commitment to learning are what set you apart, and I’m here to support that journey.

So, I’ll take the approach of a junior researcher to first explore the need, demand, and supply of gold. While many factors can influence prices, at the heart of it all lies the basic principle: demand and supply.

Understanding the Demand of Gold

Globally, gold usage mainly falls into three categories: jewelry, investments, and industrial use. Here's a simple breakdown:

Jewelry:
Around 50-60% of the world’s gold demand is for jewelry, making it the biggest segment. In India, gold isn’t just a piece of ornament; it’s a symbol of wealth, tradition, and status. Be it weddings, festivals, or other ceremonies, gold plays a key role. This deep-rooted cultural significance has kept the demand for gold jewelry steady over the years.
Investment (Bars and Coins):
About 30-40% of global gold demand comes from investments like gold bars and coins. This includes individual investors, central banks, and even funds that hold physical gold. In times of uncertainty, people flock to gold as a "safe haven." It’s liquid, trusted, and has a strong track record, making it ideal for both short-term profit and long-term wealth.
Industrial Use:
A smaller, but still important, 10% of gold demand is for industrial purposes. Gold’s special properties, like conductivity and resistance to corrosion, make it crucial in electronics, medical devices, and even aerospace. While this is the smallest segment, it's steady and driven by the latest tech needs.

These numbers can change every year, depending on market trends, economic conditions, and global events.

For example, during tough times, investment in gold might shoot up, while demand in other sectors could slow down. Conversely, in a strong economy, jewelry sales often rise, especially in countries with a strong gold-buying culture.

Historically, investment demand has surged during times of economic crisis, often outpacing jewelry demand. In 2008, the financial crisis led to a 50% spike in gold investment demand.

Understanding the Supply of Gold

Now that we’ve covered the demand, let’s look at the supply of gold, which plays a big part in its price. Gold supply mainly comes from two sources: mining and recycling.

Gold Mining:
Mining is the main way we get new gold. Big producers include countries like China, Russia, Australia, and South Africa. However, mining isn’t easy. It requires a lot of exploration, digging, and refining. Plus, it’s becoming harder to find new gold, and many mines are running out. This limited supply is one reason why gold keeps its high value. When less gold is mined, prices can go up, especially if demand is strong.
Recycling of Gold:
Recycling is another way we get gold. People sell their old jewelry, and electronics are broken down to recover gold. When gold prices rise, more people decide to sell or recycle their gold, adding to the supply. However, recycling alone can't meet the global demand, so mining remains crucial.
Central Bank Sales and Purchases:
Central banks also play a role in the gold market. They sometimes sell their gold reserves to raise money or, on the other hand, buy more gold to strengthen their reserves. These actions can have a big effect on the gold available in the market and its price.

The balance between supply and demand is what ultimately determines gold’s market price. For instance, when supply tightens due to reduced mining or limited recycling, prices tend to rise. Conversely, if there’s an influx of gold due to increased recycling or central bank sales, it can lead to a temporary drop in prices.

Factors That Influence Gold Prices

Now that we know how demand and supply shape the gold market, let’s dig into the key factors that impact gold prices. While the basics boil down to supply and demand, there are several other influences that can cause prices to swing up or down. Here are some of the main ones:

Economic Conditions:
Gold is often seen as a "safe haven." When the economy is unstable—like during recessions or times of high inflation—people turn to gold for safety. This increased demand drives prices up. On the other hand, when the economy is doing well and stock markets are booming, gold demand might slow down, causing prices to dip.
Interest Rates:
Interest rates have a direct impact on gold prices. When interest rates are low, keeping money in the bank doesn’t give good returns, so people look for other ways to invest, like buying gold. This drives up demand and, therefore, the price. When interest rates are high, people prefer to save in banks, which can lead to lower demand for gold and a decrease in its price.
Inflation:
High inflation erodes the value of money, which makes gold a more attractive store of value. When people expect inflation to rise, they often buy more gold to protect their wealth. This increased demand usually results in a price hike. Conversely, when inflation is low, the rush to buy gold slows down, stabilizing or lowering its price.
Currency Fluctuations (Especially the U.S. Dollar):
Gold prices are typically quoted in U.S. dollars. When the dollar weakens, gold becomes cheaper for people using other currencies, boosting its demand and pushing prices higher. On the flip side, a strong dollar makes gold more expensive for non-dollar buyers, which can lower demand and bring prices down.
Global Events and Geopolitics:
Wars, natural disasters, trade tensions, and political instability can all impact gold prices. In times of uncertainty, people buy gold as a secure asset, causing prices to soar. For instance, during the COVID-19 pandemic, gold prices hit record highs as people rushed to it for security.
Gold Production Costs:
The cost of mining and producing gold also plays a role in its price. If mining becomes more expensive due to factors like stricter environmental regulations, higher fuel costs, or lower ore quality, the supply of gold might decrease. As mining costs rise and new gold becomes harder to find, any supply disruption can lead to rapid price spikes, as seen in the early 2010s.

These factors often work together, creating a dynamic and sometimes unpredictable market. For example, if global tensions rise, gold demand can shoot up despite low inflation or strong currency. Understanding these influences gives us a better picture of why gold prices move the way they do.

The Bigger Picture: What This Gold Rally Really Means

Gold’s recent surge to ₹77,000 per 10 grams is more than just a price spike; it signals deeper shifts in the economy. As we discussed earlier, gold's demand mostly comes from jewelry, investments, and industrial use. But when prices rise nearly 50% in just two years, something bigger is happening.

So, why is gold suddenly in the spotlight? The answer lies in the global economy and market uncertainty.

1. The Dollar and Interest Rates:
A major reason for this rally is the changing value of the U.S. dollar. Gold, priced in dollars, becomes more attractive when the dollar weakens. Recently, the U.S. Federal Reserve cut interest rates, reducing returns on bonds. This made gold a more appealing choice for investors looking for a safe place to park their money.

2. Inflation and Safe Haven Demand:
Rising inflation is eating away at the value of currencies. Central banks are printing more money, which lowers the worth of paper currency. In such times, both people and governments turn to gold. Its limited supply and lasting value make it a trusted hedge against inflation.

3. Central Bank Buying:
Central banks have been on a gold-buying spree. In 2022, they bought 1,136 tonnes of gold—the highest in over 50 years. This buying continued in 2024, as banks look to protect against currency crises. When central banks stock up on gold, supply in the market shrinks, driving prices up.

4. The Money Supply Link:
The world’s money supply, especially in the U.S., has grown rapidly. Historically, gold prices have tracked this growth. When too much money is in circulation, people lose faith in paper currency, pushing them to invest in gold as a safe asset.

5. Rising National Debt:
The U.S. national debt is now at a massive $35 trillion. This growing debt increases economic risks, prompting more investors to turn to gold as a hedge.

Where Does This Leave Us?
This rally isn't just about short-term price changes. It's a sign of the uncertain times we live in. While the future of gold prices is uncertain, the reasons driving this rally are clear.

Gold is more than a metal; it’s a reflection of the global economy’s health. This rally might be hinting at larger shifts ahead. In the end, the real value of gold lies not just in its price, but in what it represents in these changing times.

Is this gold price rally hinting at tough times ahead for the global economy, and if so, how should I adjust my financial strategy?

What Did You Learn? Let's Connect and Discuss!

Now that you've delved into the nuances of gold's rise, I’d love to hear your thoughts. Comment below with your key takeaway, and I'll be happy to organize a Zoom discussion where we can explore the risks and opportunities that gold presents in today’s market.

This will be a chance for us to discuss in detail how you can navigate the current economic landscape. Your comment helps me find your email, so I can send a personal invite on your email.

Let’s make sure we’re prepared for what’s ahead, together!

Regards, Kundan Kishore