Why Are Gold Prices Rising When Demand Keeps Falling?

The demand for gold in India was 797.3 metric tons in 2021, 78.6% more than in 2020. This surge in demand led to a chain reaction of gold price hikes, peaking at 747 in 2023 before declining sharply in early 2024. Why is India’s oldest and most comfortable asset losing its demand even if the price keeps moving upwards? The reasons are surprisingly simple.

An Ironical Case Of Rising Prices Amid Falling Demand

The decline in demand is not a sudden trend. 2023 witnessed the beginning of a declining trend as soon as the price touched INR 63,000 in May and remained stable till December. Global economic uncertainties have led major governments and banks to accumulate maximum gold in their reserves to hedge against inflation. Geopolitical tensions, inflation concerns, and currency fluctuations are the secondary factors aiding the rise of Gold imports in India.

First, gold is a limited commodity traded on similar lines to stocks. Retail investors' behavior surrounding physical gold, gold ETFs, and gold bonds follows the same routine. The sharp increase of 9% in the first quarter of 2024 raised the gold price to INR 72,980. Reaching an all-time high often leads to a drop in demand, owing to the risk of the price dropping in the future. Due to the highly volatile market situation, Indian consumers have held back from buying more, even though the Reserve Bank of India added 4.7 tonnes of gold in February, taking its gold reserves to an all-time high of 817 tonnes.

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Indian Businesses Face The Consequences

The sharp rise in early 2024 has created a big bubble of skepticism. Owing to the sky-high prices, this is the best time to sell for those who buy gold as an investment instrument. The fall in buying demand has had the biggest impact on the jewelry industry, including miners, makers, and retailers. Jewelry businesses are experiencing an increase in footfall of retail gold sellers who want to leverage the price hikes while buying has dropped significantly.

A Safe Haven In Times Of Crisis

Indians have always favored gold over any other investment medium. Its significance in an Indian household ranges from a mandatory ornament used on important occasions to an ever-growing asset kept safely in lockers. Since 2020, gold prices have moved up over 69%. Compared to the 46% rise in the Sensex during the same period, gold won Indian hearts as a better investment. Gold also facilitates instant liquidity during emergencies, unlike redeeming invested money from the stock market, which usually takes longer to reflect in one’s hands.

The World Gold Council’s annual Central Bank Survey for 2022 and 2023 indicates that gold’s performance during crises and its role as a long-term store of value are key reasons for central banks to hold it.

The Golden Bubble Will Burst Soon

Even though the current situation looks controversial for buyers and sellers alike, the bubble is about to burst soon. As soon as the organizational hoarders begin liquidating gold to tap scaling opportunities, the abundance of gold in the market will replenish. There is less possibility for Gold prices to fall this year, but if it happens, the market will re-attract retail consumers and investors. Even if it does not fall, the upward price movement will stabilize soon as the ongoing international tensions settle down. For businesses, this period is a great time to explore marketing opportunities and ramp up brand awareness to get the maximum benefit out of the upcoming demand. For retailers, holding on to the existing gold assets is the best foot forward till the market stabilizes.

What do you think will happen to the gold price and demand in the near future? Let me know your thoughts in the comments below, and we can engage in a productive discussion to help others raise awareness of the current market.