Gold Breaking the Code
- 25 Feb
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The investment in gold is a way to diversify the risks. Gold markets like any other are volatile and subject to speculations. Amongst further precious or non-precious metals investment in gold is the most effective and safest one. In the last few months, the prices of gold have touched new heights. It still is, amid the uprising of covid-19 pandemic and other significant factors affecting the prices. The yellow metal has always been a subject of economic interest.
Apart from fixed deposits or stocks or mutual funds, gold is one of the most preferred means of investing. The customers buy this metal to use in times of financial crisis and reap benefits when the metal price goes up. Because of its long-term stability, gold easily attracts investors. The Gold loans are becoming popular but have higher value due to a surge in gold prices. Gold prices are sensitive to the fluctuations in the rupee-dollar equation.
This blog will discuss the essential factors that impact gold price with particular reference to the impact of COVID-19, expert advice, and gold price prediction for 2021 and the best month to buy/sell gold.
Factors that Influence Gold Prices: The price of gold has increased substantially in recent weeks. Is the rise in gold prices standard? Should investors worry about the sudden surge in gold prices? Let us have a closure look at some of the factor that influences the price of gold.
Demand and Supply: India is the largest consumer of gold for jewellery, bars, and coins in terms of volume. Gold is a liquid asset as it can be sold for cash on the spot. The shift in demand and supply affect the price of the yellow metal. As per the basic theory of supply and demand, when the market is high, the cost of gold increases.
Inflation: When the inflation is high, the demand for gold increases and the value of currency decreases in both international and Indian markets. The yellow metal holds significant value and can be used in cash to cope with inflation when there is a high demand for gold from customers; the price of gold increases.
Rate of Interest: There exists a strong inverse relationship between gold prices and real interest rates. When the interest rates rise, the cost of gold drops as more people start selling gold and investing in deposits to earn high interest. On the other hand, when the interest rate falls, the price of gold increases as the stakes start fetching fewer returns, and people start buying gold that causes an increase in demand for gold.
Indian Jewellery Market: During special occasions like Dhanteras, Diwali, and Weddings, the demand for gold jewellery increases leading to a demand-supply mismatch. The existing difference between demand and supply causes an increase in its price. Apart from the jewellery requirements, gold is used in large quantities by electronic companies. It is also used in the manufacturing of medical devices like stents and precision electronics like GPS units. The yellow metal demand has increased from time to time, causing a rise in its import.
Gold Reserves: The Central Banks like the Reserve Bank of India, holds both currencies and gold reserves. Through the Reserve Bank of India, the Indian government buys and sells gold that causes an increase or decrease in the gold price. If the Central Bank buys more gold, then the gold price goes up while the supply of gold goes down.
Import Duty: India is the world’s largest consumer of the gold and fifth-largest importer of gold. If the amount of gold imported exceeds the import duty free-range, then the custom duty charges are implemented per gram of gold. The import duty determines the price of the gold. When the import duty increases, gold prices go up and vice-versa.
Value of the US Dollar: The gold is traded in the US Dollar in the international markets. The price of gold is inversely related to the value of the United States Dollar. Any fluctuation in the value of currency directly affects the import/ selling price of the gold. The strong USD indicates a decline in gold price while the weaker USD suggests a hike in the gold prices because of the increase in customer’s purchasing power and demand for gold. The Weaker dollar increases the value of other countries’ currencies, while the Strong dollar decreases the value of other countries’ money.
Mining Companies & Production: The less supply is another factor responsible for changes in gold rates. It can take years to reach full production in the case of new gold mines. Now, it has become tuff to get access to quality gold reserves because of factors such as loading flooding subsidence and structural failure mismanagement, negative publicity, nationalization, theft, and corruption. The spread of the COVID-19 pandemic has also affected the gold mining activities in various countries. All these factors have contributed to a drastic fall in gold prices, causing huge losses to the gold mining companies investing in gold.
GST on Gold Imports: The liquidity and popularity of the yellow metal are influenced by fluctuations caused in price. International imports are not subjected to GST payment instead of custom duty at the rate of 10 percent is imposed on gold being imported from outside India. Suppose jewelry is manufactured using gold imported from overseas. In that case, the end-users have to pay customs duty, and the fixed percentage of GST applied to the value of gold and making charges. According to Coverfox, an IRDAI authorized insurance broking firm,“There has been a significant rise in gold prices as a result of the 3% GST that has been charged on 10% of import duty. This has made the yellow metal expensive by 0.75% post-GST, as a result of this reason“
COVID-19 pandemic caused a lot of economic disruption, as many industries and businesses were shut. It also affected imports and exports. Many investors thought the economy would recover quickly amid the coronavirus pandemic. There is a high uncertainty surrounding this pandemic because Gold prices in India continued to remain near record highs. According to the Indian business news publication Mint,“In 2020 so far, gold prices in Indian markets have risen 27.97%, international gold prices have surged 22.16%“.
Will Gold Rate Decrease Or Increase In Coming Days 2021?
The year 2020 saw a recession across the global economy, and the yellow metal demand is higher than it was in previous years. The prices of gold in India are affected considerably by the International Markets. The economic slowdown across the world’s developed countries like the United States and China has affected India’s price. There was a constant rise in gold’s international price that triggered investors to invest in safer options like gold. The demand was impacted by recurring lockdowns, unprecedented gold prices, and inauspicious periods based on religious beliefs“, the Motilal Oswal report highlighted.
Investors have to prepare themselves for volatility and interest rate movements to take away maximum profits from gold investment in the coming years. As the finance and market experts predict gold prices to rise even more, below are the factors that will guide markets in 2021.
Gold Jewelry Recycling: Today, the gold-recycling industry has become a multibillion-dollar industry.“With gold imports falling by 57 percent in the first half (H1) of the current financial year 2020-2021 (FY’21), demand for the recycled gold may go up during the festive season“, Outlook stated. As the raw gold is inadequate in the market and the gold imports have fallen due to the recent pandemic, the demand for recycled gold and its price goes up. However, there is some cash for your gold companies that remove stones from gold jewelry and discard them. Therefore, the customers need to be very careful and make sure that they buy or sell gold at the best price.
Interest Rate and Inflation: Gold is considered the best investment that promises good returns in times of economic uncertainty and instability. Gold is rare, and gold extraction is a complex process. The relationship between inflation and real interest rates determines the periods favorable and unfavorable to gold. Real interest rates tend to increase the cost of borrowings and reduce disposable income. In the case of negative actual interest rates, inflation is high, and interest rates are low.
This situation is favorable for gold investment. On the other hand, the positive real interest rate reflects when inflation is low and actual interest rates are high that is not favorable for gold investment because the price of gold tends to drop. There exists an inverse relationship between the price of gold and the real rate of interest.
GST On Gold & Gold Jewellery Prices:
The Goods and Service Tax is an indirect tax imposed on India’s consumption and supply of various goods and services. In gold, GST is applied to both the manufacturing of gold ornaments and the collection of the gold. Presently, In India, gold sellers collect a GST of 3 percent from the buyers of gold, and an additional charge of 5 percent of the price is added in the form of the making charges.
Apart from this, the sellers also have to pay an import duty of 10 percent for gold import. But if you are selling off gold acquired through ancestry or gifted gold or purchasing the new gold jewellery in exchange for gifted gold, you don’t have to pay GST taxes. The introduction of GST on gold jewellery has made gold expensive and lowered its demand.
A fixed percentage of GST is charged on gold value, and the portion collected to the making charges vary from jeweller to jeweller. This variation in making charges of gold jewellery has influenced GST taxes. The introduction of GST has led to an increase in the price of gold jewellery. Most of the gold imported is used in making gold jewellery or ornaments in India. The government is bringing in taxes to minimize the share of imported gold and strengthen the domestic currency. Implementation of the GST works as an advantage for the organized sector because most of the unorganized sector doesn’t wish to pay GST imposed on gold sales.>
What Experts Predict About Gold Prices?
According to the New York-based data technology company, Knoema, “The World Bank predicts the price of gold to increase to $1,470/oz in 2020 from an average of $1,360/oz in 2019?. Many Experts are optimistic and believe that gold is still a safe investment.
Experts also believe that in the next 6 to 1-year horizon due to financial market uncertainty and RBIs monetary policy rates, and gold demand will probably rise and attract investors in the commodity market. Including India-China reforms will add up the long-term demand of gold in the market”, published on India TV web site.
The Goldhub’s Gold mid-year Outlook 2020 examined the gold status. They stated that “Gold had a remarkable performance in the first half of 2020, increasing by 16.8% in US-dollar terms and significantly outperforming all other major asset classes
The Best Months To Buy Or Sell Gold
Where experts advise buying gold when prices are low as an investment in India, during the festivals like AkshyaTritya or Diwali and in Wedding seasons, when buying or gifting gold is deemed auspicious there is a noticeable rise in the gold prices. This hike is caused by an increase in demand for gold, whereas the supply remains more or less static. The perfect time for selling gold depends on US dollar value as internationally gold is influenced by US dollar.
A weak dollar can push the gold prices up and vice versa. For those interested in investing and trading in gold, it is suggested to keep an eye on the US gold inventory. The best months to buy gold can also be calculated based on the average gold price gain or loss made throughout the year.