Why Gold Price is Rising

We Indians love gold. We are also long on gold, i.e., we own it in some form or another.

Thus, we want to see the gold price go up, the higher the better.

So, it should be no surprise that discussions about gold have increased recently. After all, the price of gold has hit all-time highs in India.

The price of the yellow metal has moved up sharply after a consolidation period of a few months. It has soared above Rs 65,000 per 10 gm in the Indian market. Gold futures on the MCX hit a high of Rs 65,140 per ten grams yesterday, 5 March.

This is welcome news for most of us who own gold. But it also raises questions about the reasons behind the up move.

So why is the price of gold rising?

Here are the 3 main reasons...

#1 Inflation and Interest Rates

Gold has historically acted as a hedge against inflation. It's record in this regard is quite good going back 3,000 years.

Inflation has remained sticky all over the world. Although the rate of inflation has declined since 2022, it still hasn't gone back to pre-covid levels.

This has provided support to the gold price.

Now, central banks have raised interest rates to counter inflation. However, there is an emerging consensus that interest rate hikes can only go so far. After a point, market forces i.e. reduction in demand will have to bring down prices to acceptable levels.

This is because, central banks are not comfortable with the idea of raising rates so much that it triggers a recession.

High interest rates are associated with a falling price of gold. However, if interest rates have peaked, then gold has room to go higher.

#2 Fears of a Recession

Much of the developed world is already in a recession. The US has held out quite strongly. However, there is rising concerns in the US that the economy has begun slowing down.

If the slowdown in 2024 is serious enough and interest rate cuts don't come soon, the US could follow the rest of the developed nations into a recession.

Right now, that possibility appears low due to the strong labour market in the US but many other indicators are not so positive.

Gold is the ultimate asset to buy in times of fear and uncertainty. Media report suggest central banks have increased their gold purchases recently. There has been strong demand for gold from individuals in wealthy nations, especially the Middle East.

Thus, higher demand due to fears of bad economic times ahead, is also a reason for the recent rise in the gold price.

#3 FOMO

Finally, there is a mostly under-appreciated reason for the rise in the gold price.

Gold is an emotional asset, perhaps even more than stocks. Whenever the price of gold rises, everyone starts to talk about it.

These conversations create a sense of desire to buy more of the yellow metal. Those who didn't buy in earlier rallies feel a fear of missing out (FOMO).

They hear stories of people who bought gold at Rs 45,000 / 10 gm and are now sitting on solid profits. This creates a sense in their minds that they have missed out on a golden opportunity.

They can't even justify not buying earlier due to reasons like 'risk', like people do if they say no to buying stocks. Gold is not a high-risk asset and is nowhere near as volatile as stocks.

This felling of FOMO when the price of gold is surging, is a strong motivation to buy more gold, especially in Gold ETF form, as it enables quick buying and selling. We have seen this happening in the past as ETFs have become popular.

Conclusion

At Equitymaster, we recommend holding at least 5-10% of one's total investments in gold. It makes sense to hold some gold in one's long-term portfolio, but it doesn't make sense to speculate on short term price movements.

Also, while considering an investment in gold look beyond 2024. Just because the price of gold is going up this year, doesn't automatically make gold a great investment.

Do your due diligence.

If you're interested in adding gold to your investment portfolio, this editorial will be helpful: How to Invest in Gold in India.

If you want to invest via in an electronic format do read this article: How to Invest in Digital Gold.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...