Surge in gold rates signals nervousness

History was made last week when the price of gold soared above Rs 1 lakh per 10 gm in the international market, before declining marginally. It is still ruling near the record rate. The price of 24 carat gold (999 fineness) was quoted at Rs 99,000 per 10 gm in the Mumbai bullion market on Friday. The price of 22 carat gold was quoted at Rs 92,000. The prices remain bullish and are likely to go up further. Gold prices have been gaining for months. Historically, rates have always been going up, except during small periods of weakness or stagnation. Over the long period, they have never looked back. The trigger for the recent particularly firm trend is the jitteriness over US President Donald Trump’s tariff plans, and the public threat he issued to the US Federal Reserve. Trump recently said that he couldn’t wait to sack Chairman Jerome Powell for not cutting interest rates. Though he later said he had no such plan, the uncertainty impacted all markets, and gold is highly sensitive to market sentiments. 

There is concern that the tariff war would lead to an increase in inflation and interest rates. Any action against the federal reserve aggravates the situation. Gold is the safe haven in times of economic and political uncertainty. Inflation fuels gold prices because it is bought and hoarded to beat the fall in currency value. The fall in the value of conventional currency is a major reason for the current spike in gold prices. The dollar is now at its lowest since 2022. A weak dollar boosts gold demand because it makes the metal more reliable to investors. Other contributory factors are the concerns over the US economic outlook, the looming US debt crisis, and the continued buying by China, global central banks and institutional investors. Geopolitical tensions arising from the war in Ukraine, coupled with other global problems, have added to making gold dearer. 

The rising gold prices will have a major impact on India, the second largest gold market in the world after China. Gold demand in the country in 2024 stood at 802.8 tonnes, as against 761 tonnes in 2023. The gold demand value went up by 31% at Rs 5.15 lakh crore in 2024. Gold is not just an economic good but also a cultural good in the country. The import of gold, an unproductive asset, skews the economy. The high prices will also encourage smuggling. Years of campaigning against the hoarding of gold has had little effect. The country is entering the marriage season now. High gold prices will hurt the budgets of many, especially when economic growth is slowing down.