Domestic gold surged to a fresh all-time high, with the most active MCX near-month futures booming to Rs 64,460 per ten grams in December. Firm overseas prices, the weak Indian rupee, and expectations of an increase in jewellery demand amid peak wedding season propelled the sentiment towards the metal.
Wedding-related demand in India
India has historically been one of the largest consumers of gold globally, and the demand for the commodity in the country is influenced by various factors including cultural, economic, and investment considerations.
It is often purchased during festivals, weddings, and other auspicious occasions. Many families consider gold jewellery as a form of wealth and a symbol of prosperity. During the wedding season, which is typically around November to February, demand for gold tends to surge in India.
Indian wedding-related jewellery demand is expected to be at its peak this year. As per the Indian trade body, almost 38 lakh marriages were held in the country in the months of November and December. Weddings contribute to almost 50 percent of the gold demand in India. The forecast of an increased need for jewellery lifted domestic gold prices.
Weak Indian rupee
A weak Indian rupee is another reason for prevailing high prices in the country. The Indian rupee has been hovering near its weakest level in the last several months. It lost against major currencies like the British pound, Euro, and Japanese Yen recently. Since 2022, the Indian rupee has lost more than 11 percent so far.
When the rupee is weak compared to other currencies, the cost of importing gold rises, leading to higher domestic prices. The landed cost of gold in India is significantly influenced by the exchange rate between the Indian rupee (INR) and the U.S. dollar (USD), as gold is internationally priced in USD. A weaker rupee means more rupees are required to purchase the same amount of gold.
Overseas prices too rallied to new highs
Since Indian gold prices are highly correlated with international prices, a firm overseas price also helped the metal. International gold prices serve as a benchmark for gold prices worldwide, including in India.
Gold prices have risen for two consecutive months, with the Israel-Hamas conflict boosting demand for the safe haven asset. On 4 December 2023, gold prices reached a record high of $2,135.39, surpassing the previous all-time high set in 2020.
This was due to traders becoming more confident that the Federal Reserve would cut interest rates in the new year. A shift of investor preference from US assets to safe assets like bullion assisted the yellow metal.
US Federal Reserve’s policy changes
There are forecasts that the US Federal Reserve may end its policy tightening and start cutting rates by the next year, causing weakness in the US dollar and bonds. The US dollar index corrected by more than 4 percent since October and the US treasury yields started sliding moderately.
The relationship between the US dollar and gold is often characterized by an inverse correlation. When the US dollar weakens, gold prices tend to rise and vice versa.
Earlier, gold prices in the international markets were primarily driven by real interest rates. Robust US economic release boosted bets of higher-for-longer rates which end up lifting the US currency and bond yields. Short-term investors were attracted by higher real income by investing in government bonds and currency which make bullion less attractive in relative terms.
Geopolitical uncertainties across the globe
The ongoing war between Russia and Ukraine and the growing conflict in West Asia has raised geopolitical concerns about stable economic growth. Geopolitical uncertainties can have a significant impact on gold prices. Gold is often considered as safe-haven asset and investors tend to flock to it during times of geopolitical turmoil or uncertainty.
The yellow metal is traditionally seen as a store of value and hedge against economic and political worries. When there are tensions growing investors may seek relative safety on gold increasing the demand and thus the prices of the metal.
With the perception of increased risk in financial markets due to factors like war, investors may reduce exposure to more volatile assets and increase their holdings in safe assets like gold. Prices of the metal are also supported due to possible volatility in currency, supply disruption, and the central bank’s policy changes.
Outlook
Since prices are at a record high there are chances of a correction possibly in the first quarter of next year.However, on a broad basis, domestic gold is most likely to continue with its positive outlook. A weak INR and expectations of jewellery demand would offer downside support to the metal.
Meanwhile, there are chances of some immediate headwinds to gold in the international market. US policy decisions, firm equities, and the performance of US assets would dominate the metal’s outlook initially.
However, expectations of cutting interest rates by the US Federal Reserve and ongoing geopolitical uncertainties may dent major selling pressure in the commodity. International gold prices are most likely range-bound and are less likely for major rallies or selloffs in the coming year.
