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The Gold Rally

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Drivers of the Gold Rally

  • Safe-Haven Demand Due to Trump’s Economic Policies
    • Investors are diversifying away from dollar exposure due to concerns over tariffs, trade policies, and economic uncertainty.
    • Central banks, particularly in Asia, are buying gold to stabilize their reserves against US policy shifts.
  • Macroeconomic Factors Supporting Gold’s Rise
    • Stock market volatility is increasing demand for safe assets like gold.
    • Rising inflation expectations make gold attractive as an inflation hedge.
    • Easing interest rates (anticipated US Fed cuts) reduce the opportunity cost of holding non-yielding assets like gold.
    • The US government’s borrowing program could impact global liquidity, indirectly benefiting gold.

Market Dynamics & Risks

  • Sustained Institutional Demand vs. Weak Retail Sales:
    • Strong institutional and central bank purchases continue to push prices higher.
    • Retail demand is weakening, especially in Asia, due to:
      • High gold prices, making jewellery less affordable.
      • A stronger dollar, which increases local currency costs of gold imports.
      • Off-season slump, further discouraging inventory buildup by jewellers.
  • Speculative Risk to Gold Prices
    • Large speculative long positions in the gold futures market could lead to a sudden price correction if unwound.
    • However, fundamental drivers (central bank purchases, macro risks) are strong enough to mitigate a speculative downturn.

Impact on India’s Economy

  • Gold Imports & Trade Deficit
    • Gold import volumes are plateauing, offering temporary relief to India’s trade deficit.
    • However, export uncertainty (due to slowing global demand and trade disruptions) may widen the deficit in the long run.
  • Retail & Jewellery Sector Challenges
    • High gold prices & a strong dollar are squeezing jewellery demand in India.
    • The government has reduced import duties on jewellery to revive demand.
    • More policy support may be needed, especially as festive-season gold buying approaches.
  • RBI’s Gold Reserve Strategy
    • The RBI remains cautious in its gold-buying approach, balancing between:
      • Risk of revaluation losses if US Treasury yields rise.
      • Gold’s role as a diversification tool against currency fluctuations.
    • Unlike some Asian economies, India is not aggressively de-dollarizing trade, reducing the urgency for gold accumulation.

Way Forward

  • The gold rally is likely to continue, supported by central bank buying, economic uncertainty, and US monetary easing.
  • India’s jewellery sector is under pressure, requiring policy intervention to revive demand.
  • The RBI’s gold-buying approach is cautious, reflecting a balanced reserve management strategy.
  • The key risk is speculative unwinding, but strong fundamentals limit the likelihood of a major price correction.

Source: TET

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