Domestic and overseas gold prices hovering near new lifetime highs
The yellow metal hit a new lifetime high in both domestic and overseas markets in February. Uncertainty over US tariffs bolstered gold’s safe haven appeal. In addition to firm overseas prices, a record weak Indian Rupee and stable demand offered additional support to domestic gold prices.
Gold prices in the key London market hit a high of $2956 an ounce, gaining over 12 percent so far this year. During the same period, domestic prices gained over 14 percent.
Uncertainty over Trump’s foreign and trade policy
The US President Donald Trump’s recent threat of imposing tariffs on countries like Canada, Mexico and BRICS nations has raised concerns over a trade war, shifting investor sentiments towards safe assets like gold and silver.
President Trump announced 25 percent tariffs on imports from Canada and Mexico and 10 percent on Chinese goods, but later he put a hold on tariffs on Canada and Mexico, but not on China. Shortly after, China announced retaliatory tariffs on American products including crude oil, coal and LNG. Uncertainty surrounding these tariffs has caused market volatility with investors seeking refuge in gold.
Gold is traditionally seen as a safe-haven asset during periods of instability. The tariffs have heightened concerns about inflation and economic growth across the globe, further boosting its demand.
The tariffs have also affected currency markets, with the US dollar strengthening. A stronger dollar typically makes gold more expensive for foreign buyers, but the safe-haven demand has outweighed this effect.
All time weak Indian Rupee
In addition to the firm overseas market, the incredible rally in domestic gold is associated with the weak Rupee and prevailing high demand.
India is the second largest consumer of gold, meeting most of its needs through imports. When the rupee weakens against the US dollar, the cost of importing gold increases. This higher cost is passed on to consumers, causing a rise in domestic gold prices.
Indian rupee dropped to a lifetime low of Rs87.64 against the dollar this month. In the last 5-year period, INR lost more than 24 percent, leading to higher domestic prices.
Increased demand due to duty cut and seasonality
Despite surging overseas prices, prevailing high demand is another reason for record high rates in the country. As per reports, in addition to the existing gold jewellery demand, gold investment demand has been on the rise in the country. In 2024, investment demand, especially in the form of gold ETFs, digital gold and coins, has surged by 29 percent to an 11-year high.
The reduction in import duties helps to revitalize jewellery demand. Duty on gold in the country was slashed to 6 percent in the previous year’s budget with a view to curb illegal imports and make gold more affordable for customers.
Bullishness continues since 2022
Gold has been in bullish territory since the end of 2022. It has succumbed to very little correction since then due to elevated geopolitical tensions that have increased the safe-haven demand for the commodity.
Meanwhile, in 2024, the performance of gold was the best over a decade with the key London spot prices surging more than 28 percent. A similar trend was mirrored in the domestic market as well.
Factors like escalating geopolitical tensions, uncertainties over US Fed’s policy decisions, a feeble global growth outlook and robust demand from various central banks bolstered the appeal of the metal in 2024.
Gold in Indian markets surged more than 24 percent supported by a firm overseas market and an all-time weak Indian Rupee.
A sharp cut in import duties in the Union budget caused a dramatic selloff in July but recovered swiftly later. The Indian Government had slashed the duty on gold and silver by 6 percent last year, which prompted investors to buy gold at discounted prices.
A record weak Indian rupee offered additional support to domestic gold prices. Indian rupee declined more than two percent last year due to persistent inflation and significant foreign outflows.
Outlook remains bullish but potential correction is on the cards
Looking ahead, the short-term outlook of the metal remains positive in the domestic market due to weak currency and increased seasonal demand. However, intermittent corrections cannot be ruled out as prices are hovering at record highs.
Overseas prices remain volatile due to worries over trade and foreign policies taken by the new US government and the performance of the US dollar. However, signs of easing geopolitical tensions and measures taken by various governments to boost economic growth are likely to reduce gold’s haven appeal gradually.
