Gold Prices: Factors behind the rise

Since March 2020, to curb the spread of the Coronavirus, most nations have implemented lockdowns. While this brought the spread of the virus under a reasonable amount of control, it also caused a lot of economic disruption since imports and exports were canceled and businesses were down and eventually got shut.

While the government announced several stimulus packages to support the people and firms during these hard times, interest rates slumped and many investors started moving away from investing in risky assets. This in turn increased the safe-haven appeal of gold.

But, now many people will raise a query that the lockdowns started in March, why have gold prices have started surging now?

The answer is, Initially, investors hoped that the economy would revive quickly as the lockdowns were lifted, companies resumed operations and people went back to work. And thus, many investors started buying high-quality, undervalued stocks. However, with time, the hopes of a short-term recovery got destroyed and yet again, investors started looking for a safe haven for their funds instead of risky assets.

 As gold is considered to be a perfect hedge against economic turmoil and inflation, the demand for gold increased.

Now let’s discuss the factors that directly affect the price of gold.

1. Reduced Gold Mining

The primary factor that affects gold prices is the demand and supply equation. While the demand for gold increased, gold mining activities were severely impacted and were at a halt due to lockdowns across the globe. This impacted the supply and caused the prices to rise higher.

2. Globally Liquidity 

In India, till August 31, 2020, The RBI allowed borrowers to avail of a moratorium on loan repayments. The Govts globally declared a lot of stimulus packages to pump liquidity into the markets. This resulted in heavy money printing and quantitative easing, due to which the value of international currencies such as USD, Euro, etc declined. Moreover, these currencies share an inverse relation with gold prices which in turn resulted in skyrocketing of the same. Also, the economies had a situation where investors had money to invest, but the markets were highly volatile and interest rates were declining. Hence, they decided not to risk the amount and started investing in gold that is known to be a safe investment during such times.

3. Exchange Rate

The Indian Rupee has fallen sharply since the pandemic due to the imposed nationwide lockdown. Currently, it is around 75 against the USD. Since India is the second-largest importer of gold, such exchange rate fluctuations impact gold prices significantly.

4. International Gold Prices

The price of gold in India is affected by its prevailing international prices. Over the last few months, the rising number of covid cases, increasing tensions between countries, and overall economic slowdowns have led to a constant hike in gold prices around the globe. Investors tend to gravitate towards safe havens like gold, once they lose hope of the markets reviving in the short-run.