The price of the yellow metal is set to rise as the US Fed made it clear that it would continue to reduce interest rates, an exercise that will weaken the greenback while supporting gold prices.

That aside, the ongoing geopolitical crisis in West Asia and the continued Russia-Ukraine war have also led to the price surge as investors searched for safe havens. The upcoming US election with unclear and contrasting policies from the two candidates Donald Trump and Kamala Harris on trade, tax, and corporate governance has added to their uncertainties.

The drastic cut in the import duty on gold and silver from 15 per cent to 6 per cent by Finance Minister Nirmala Sitharaman in this year’s Union Budget had brought much cheer.

The move was aimed at boosting demand. “To enhance domestic value addition in gold and precious metal jewellery in the country, I propose to reduce customs duties on gold and silver to 6 per cent and that on platinum to 6.4 per cent,” Sitharaman had said while presenting the Budget.

According to the World Gold Council  (WGC), India’s gold imports during the January to August period rose 30 per cent year on year, touching USD 32 billion. Ahead of the festive season, imports in the month of August alone doubled to a record high of USD 10.06 billion. For India, which imports most of its gold, the price rise will impact its import bill and even the trade balance.

While the surge in gold prices could dent the incremental demand from small ticket and the not-so-regular consumers of the metal, the overall increase in global risks will make the metal shine more and overall demand will remain unaffected.

Historically, risks—whether political, economic or social—have led to an increase of gold prices, as investors turn to the metal in a bid to hedge risks against currency depreciation.

“Prices have inched upward and it is expected to increase further but that may not deter people from buying—a lot of buying is driven by the overall sentiments and this year with healthy monsoon and an increased sowing of crops, demand is likely to remain buoyant,” an analyst said.

From Rs 65,100 for ten grammes of 24 carat gold on January 1, 2024, gold has catapulted to Rs 76,550 for ten grammes as on September 25, 2024, an increase of 17.5 per cent.

Macro-economic Dynamics

The Reserve Bank of India (RBI) is also expected to continue with its gold-buying drive, an exercise that started after the outbreak of the Covid pandemic. Gold reserves of the central bank are now more than 840 tonnes, 10 per cent of the total reserves. India’s gold reserves were less than 600 tonnes 10 years ago.

RBI Governor Shaktikanta Das earlier said that the central bank is building its gold reserves. As per data, the RBI has been adding gold almost every month so far this year.

“We saw gold prices touching a new high. Irrespective of whether or not the prices can sustain at that level the rise in geopolitical and geo-economic uncertainty the world over, especially in the US, China, Eurozone and several other economies is leading to weakening of global currencies and pushing central banks to switch to gold,” said Siddhartha Sanyal, Chief Economist and Head Research, Bandhan Bank told The Secretariat.

Overall demand for gold is high and this trend will continue, he forecast.

Besides India, Turkey and Poland have also resorted buying gold aggressively.

“While the gold price rally is very likely having some impact on central bank gold demand this year, the longstanding trend of net buying remains intact,” the WGC said.

Gold Loan Market

The price rise will directly benefit the country’s gold loan borrowers as it allows them to borrow more against their holdings of the metal.

Credit against bullion is essentially a secured loan and the amount that a borrower gets is directly proportional to the amount of gold jewellery or the metal he or she has deposited with the banks or NBFCs. So when the price of gold increases, the borrowers can enhance the loan amount.

According to RBI data, the total outstanding loan amount on gold jewellery as of March 2024 was Rs 1,02,658 crore, up from Rs 89,382 crore in March 2023.

This is an increase of 14.9 per cent. Though the growth has been a little slower compared to 19 per cent recorded in the previous year, it is above RBI's tolerance level. In March 2022, the outstanding amount was Rs 74,665 crore. The surge in gold loans in the last few years has set the alarm bell for the central bank. 

Gold loan demand in India has been rising. According to most indicators, the external uncertainties could push gold prices further leading to greater demand for loans.

Overall, with rising global uncertainties and the weakening of the US dollar, gold prices will continue to rise in the coming months. Notwithstanding the increasing prices, central banks across the world may continue to buy gold to hedge their risks.