Why Gold Prices are rising in India and should you invest now?
Gold prices have been rising in the last 1-1.5 years and looks no end for it. We have seen a common phenomenon that gold prices would rise during few situations like recession, stock markets fall, etc., However the situation is changed dramatically now. Many readers have kept on asking whether they should invest in gold now. While I always say one should not purchase gold for investment purpose. In this article, we would provide various reasons why gold prices are rising in India and whether one should invest in gold now in 2020.
How Gold is performing in the last 20 years?
Let’s quickly check how gold prices flared in the last 20 years. Here are the gold rates per gram (average prices as these would vary by city)
2000 – Rs 4,400
2005 – Rs 7,000
2010 – Rs 18,500
2015 – Rs 26,343
2020 – now hovering around Rs 52,000
There is a trick I played in above by plotting the price for every 5 years. While it looks from 2010 to 2020, gold prices appreciated for almost 280%, gold prices were stagnant (with no major change) between 2011 to 2018. Means for 8 years, so called gold as an investment has given < 5% overall returns (not annualized returns).
Gold Prices rose by 100% in the last 5 years and almost 50% in the last 1 to 1.5 years.
Why Gold Prices are rising in India?
Now let us check various reasons why gold prices are rising in India. If you love investments in gold, these reasons would help you to know whether such investments would fetch you high returns or not.
#1 – Global economic slowdown – Indication of recession
This is a common phenomenon which I have seen in the last two decades. When there is fear that we are entering into a recession, gold prices started climbing up. In the last 1 to 1.5 years, there are several indicators that say we are entering into a recession. It was at a slow pace. This is one of the main indication which I could see where gold prices started going up.
#2 – Dip in interest rates – This is another major factor which is the cause for rising gold prices. Globally the interest rates started falling. We should also know that some countries charge negative interest, i.e. interest you need to pay on your deposits which you keep them in the bank. Dip in deposit interest rates would make such investors think and move to investing in gold. They don’t need to worry about low or zero interest rates on gold. Uncertainty would increase the prices of gold in due course. Due to this demand, gold prices are pushed upwards.
#3 – Covid-19 pandemic – Covid-19 has created fears across the world. Everyone is worried on their financials and looking for safe investments. Stock markets started crashing from Mar, however, was able to recover to some extent in India now. Fear of job layoffs, salary cuts, shut down of businesses, etc., is creating havoc and investors are pumping their money in gold which they believe it is a safe investment bet. This is also pushing gold prices upwards.
#4 – US – China relations inching – No need to explain the reasons in details about this. This is another major cause of concern which is pushing gold prices upwards.
#5 – Lower supply of gold due to Codiv-19 pandemic – Due to covid-19, supply of gold is reduced now in the last few months. This is also putting further pressure and gold prices rising.
#6 – Fall of US 10 year bond yield – This is another important factor that is driving gold prices. Generally, when bond yield increases, there is less attraction towards gold as gold by itself would not generate any income. Due to fall in US 10 year bond yield, funds are flowing towards investments into gold.
#7 – Weak Rupee – This is another common phenomenon seen in gold prices rising. If rupee is weak against dollar, gold prices seen rising. We are currently seeing that the rupee is trading at 74 to 75 per dollar. The dollar was available at Rs 71 over 6 months back. Strong dollar is putting pressure to gold prices to rise.
Should you invest in gold now in 2020?
I know, you are eagerly waiting to ask this question. Gold as an investment has not yielded regular returns to investors. While it looks good in the long term, for short to medium term of 1 to 8 years, you may or may not get good returns at all. Just see what happened during 2011 to 2018. You hardly got any returns during that period. Let me give a few thoughts on whether one should invest in gold now or avoid.
1) Don’t get tempted with 50% returns in the last 1 to 1.5 years. In future you may see the returns what you could see earlier like 2011-2018. Are you okay with such very low?
2) Like I said earlier, if your objective is to invest in gold to use them in future of say 7-8 years, either for your daughter marriage or for gifting gold ornaments to your spouse or sister, then you better invest in sovereign gold bonds which would give to 2.5% interest rate per annum + you would get the equivalent gold prices on the maturity of such bonds.
3) In a short term, gold prices may further go up or may be volatile till we find a vaccine for the virus. One cannot estimate when the virus vaccine would be available. It could be 6 months or 1 year or 2 years time frame. Investing in gold for short term could be risky.
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