Time and again, gold has proven its worth as a hedge against volatility and inflation. So at a time when the rupee is falling, people tend to hold on to money in the form of gold.
Usually, gold prices appreciate around the festive season. However, this time the sale of jewellery is expected to slow due to the weakening rupee. The rupee-dollar equation usually doesn’t affect the global price of gold, but since gold is largely imported in India, the domestic price surges.
The trade war between US and China, soaring crude oil prices and India’s dilemma over crude oil imports from Iran are the primary reasons for the rupee weakening against the dollar. Chances of an immediate reversal in the rupee-dollar trend are dim.
So should you buy gold at a time like this?
According to media reports, the price of gold (99.9 percent purity) was around Rs. 31,900/10 gm in the bullion market on October 5. The fear of a full-blown trade war between the US and China in the near future has pushed up the demand for gold, and its prices.
The value of rupee against the dollar is inversely proportional to the price of gold. Let’s understand this with the help of an example. Say, the rupee to dollar value is Rs 70/$ and the import cost of gold is $1200/ounce, including all charges. The price of gold in India would be around Rs. 2963.01/gram (1 ounce = 28.35 grams).
If the currency value changes to Rs 75/$ with the gold import price remaining constant ($1200), the new gold price in India would increase to Rs. 3174.65/gram i.e. higher by Rs. 211.6/gram.
In the table mentioned below, you’ll notice that the price of gold had fallen between September 2014 and September 2015 from $1204/Oz to $1147/Oz. However, due to the fall in the value of rupee against the dollar from Rs 61.15 to Rs 65.12, the gold price remained stable at Rs. 26,204 in the domestic market.
In 2018, the price of gold is almost at the same level in the international market as it was in September 2014, but due to a depreciation in the value of the rupee against the dollar from 61.5/$ to 72.24/$, the price of gold in the domestic market has surged from Rs 26550/10 gm to Rs 31700/10 gm.
International crude oil price is a significant factor that influences the value of the rupee against the dollar to fluctuate. Currently India is facing extreme pressure from the US to stop importing crude oil from Iran. If India stops importing crude from Iran, there is a possibility of a spike in the import bill, that could result in the depreciation of the rupee.
On the other hand, if India continues to import from Iran, US sanctions could result in a depreciation of the rupee.
So, India is in a Catch-22 situation and the recovery of the rupee seems difficult in the near future. Therefore, buying gold as a short-term investment may be a good idea during the festive period.
However, this works only if you are looking to benefit from the short-term change. The limited supply of gold makes the market thin and volatile. And gold, out of all investment assets, has the traits to create an asset bubble. When the bubble bursts, you lose money. So, it’s important to time your investment in gold at the moment.
While purchasing gold during this festive season, avoid paying a hefty premium to jewellers, and focus on alternative gold investment products like Gold ETFs and Sovereign Gold Bonds.