The Curious Case Of The Rise In Gold

Lower gold prices have generated a surge in global jewellery demand to 575.5 tonnes, the highest volumes seen in five years. In demand terms, the value was 20% higher than that seen in Q2 2012, according to the World Gold Council’s report on ‘Gold Demand Trends Second Quarter 2013’ released on August 15, 2013.

Today (August 16), gold prices crossed Rs 30000/ten gram levels in futures trade. The crossing of this level marked an over 3.5% rise in gold prices today. The prices have now reached levels that were last seen in March 2013.

It stands true that a firming trend in the domestic markets on account of the upcoming festive season and marriage season is influencing gold prices. Rising demand from China has also been adding to the global demand. Moreover, the lower prices have led to a shrink in supply to the extent of 62 tonnes in Q2 2013, marking a decline of 6%.

However, apart from the drop in prices leading to the shooting up of demand for physical gold, macroeconomic developments across the globe are also responsible for this rise.

In the US, expectations of the US Federal Reserve cutting back its Quantitative Easing (QE 3) programme have gained strength. An imminent tapering is being supported by consistency in reporting healthy economic data. The US Department of Labor reported that consumer prices rose in July, pushing the inflation rate closer to the Fed’s target. Moreover, jobless claims dropped to the lowest level since that in 2007.

This had two effects – one, expectations of an improvement in the economy and second, a fall in equities. Both these factors resulted in the increased preference for gold as an asset class and a consequent increase in prices. It also resulted in increased volatility in the dollar. So much so, that the rupee is currently trading at 61.70 to the dollar.

Naturally, with the rupee weakening and equities falling, investing in gold was bound to strengthen. Looking ahead, a further firming up of prices can be expected.