“Gold is forever. It is beautiful, useful, and never wears out …….value that will survive the travails of life and ravages of time”- James Blakeley
While tracking the historical performance of safe havens in India, gold trading can be one of the most lucrative options; however, it also carries certain risks. The current price of gold is 91,464 INR per 10 gms. International gold prices fluctuate on the basis of war uncertainty. Gold remains the top-performing asset, with a y-t-d gain of 13%. Costs can fluctuate significantly; hence, understanding market dynamics and risk management is essential. Let’s look at the factors affecting gold trade in India.
- Market volatility: The Gold price largely depends on the market volatility. Higher the volatility, the less stable the price. A lower index leads to a stable gold price. Gold investments are mainly safe-haven assets, but they depend largely on market uncertainty. Volatility affects the gold price in the following ways:
- Higher price swings: During higher market volatility, the gold prices can swing both upwards and downwards due to higher volatility.
- Opportunity for traders: This will provide an opportunity for traders to buy gold at a lower price and sell when it rises.
- Risk of losses: Volatility can increase the risk of losing money, especially during times of political instability.
- Geopolitical uncertainty: Indian investors must closely monitor global events such as war or terrorist acts. These factors largely affect prices. Traders might consider short-term investment options or even long-term strategic positioning in the gold market. You may spread your investments across ETFs and Gold mutual funds. The various options are:
- Gold ETFs have a high short-term potential and a medium risk level.
- Gold Mutual funds have a medium risk level and a high short-term potential.
- Physical gold will have a lower risk and a medium-term price potential.
- Inflation: Inflation affects gold prices in India due to various reasons. There’s a lot to do, from the cost of imports to interest rates. The various effects of inflation are:
- Gold as an inflation hedge: While inflation rises, currency’s purchasing power decreases. Increased demand for gold leads to a price increase.
- Currency depreciation: While currency depreciates, the value against the US dollar increases. This led to the lifting of the gold price.
- Investment behaviour: While the returns from fixed-income assets erode, investors hope for gold and other non-yielding assets.
- Impact on interest rates: To control inflation, the RBI will raise the interest rates. Higher interest rates might reduce the gold’s appeal, but the hedging demand will always dominate and keep the prices higher.
- Cost of imports: While India imports a large portion of gold, higher inflation can increase import costs, such as freight duties and insurance. This will drive the domestic prices higher.
- Economic conditions: A country’s economy plays an important role in determining the gold trends. There are various ways in which the economy can affect the gold prices in India.
- Economic uncertainty: During times of economic slowdown, job stress or declining GDP can drive gold prices to rise.
- Consumer sentiments: Gold is a cultural sentiment in India. Higher disposable income leads to greater gold consumption, and a weaker economy leads to a reduced household budget. This will affect gold purchases anyway.
- Government Policies & Duties: The Indian Government may increase or restrict import duties, affecting current deficits. Tax structure and GST can affect the gold trading volume and the retail chain.
- Performance of Stock market: When the stock market is bullish or bearish, investors might shift to safer options.
- Interest rates: Interest rates of a country have a great role to play in gold purchasing as they influence the investor behaviour, currency value, and the overall market behaviour.
- Gold holding is an opportunity: Gold doesn’t yield any interest or dividends. While interest rises, the cost of gold increases and demand might fall.
- Impact on the Indian rupee: When currency becomes stronger, imported gold becomes cheaper. When the rupee falls, the import of gold becomes expensive, and this leads to supporting higher gold prices.
- Retail & Investment demand in India: While interest rates are higher in India, investing in gold deposits is often prioritised. But when it’s lower, investors have increasing demand for gold jewellery and investments. This demand depends hugely on the market volatility.
Which trading strategies does gold trading involve?
- If you are interested in trading gold, then make use of the following strategies.
- Long-term investing: Investors like to procure gold and keep it for a longer time. This approach can bear fruit in the long run. Investors who are not driven by an instant attempt to make gains usually prefer this strategy.
- Short-term trading: Short-term gold trading focuses on capitalisation and depends on rapid price fluctuations. Investors use Fibonacci levels to identify potential support and resistance zones.
- Hedging: Investors prefer to buy gold in one market and sell it in another. This phenomenon has several guidelines.
Global economic conditions are responsible for the downturn or upgradation of gold prices. Sticking to standard trading practices can be the best way to earn profits.
What are the platforms for trading gold?
Trading gold can be done through the following platforms:
- MCX: Multi Commodity Exchange is a platform that refers to the buying and selling of gold. This platform allows a particular volume of gold booked at a specific quality that can be delivered in the future. MCX allows traders to speculate on gold price movement without owning any physical gold.
- Online Brokers: This method of trading refers to the buying and selling of gold online through options like gold ETFs and gold stocks. These facilities support gold trading in the future.
- Digital Gold platforms: This is a method that can allow individuals to buy and sell gold without actually holding it. They provide an interesting way to hold gold or invest in stocks and other assets.
What are the facts a gold trader has to be cautious?
- Market risks: Gold prices are highly volatile due to inflation data, geopolitical events, interest rates, and currency fluctuations. Any disruption in the mining operation or any shift in demand might lead to price swings.
- Economic & Monetary policy risks: The rising interest leads to a stronger dollar, and a change occurs in the price of non-yielding assets. If inflation falls, then gold demand may decline and hurt prices.
- Regulatory & Policy change: Regulatory and tax changes in the import and export fields trigger a change in the demand and price of gold. Commodity trading rules can often affect profitability and the investment flow of capital gains.
- Technological hacks: There are several technological hacks attached to gold trading. Automated trading can amplify price swings and trigger a flash crash. Digital gold platforms are vulnerable to hacking and fraud.
Gold is the most sought-after metal that can generate profits when used effectively. While the stock market sees a bearish trend, investors will look for non-yielding safe-haven assets like gold. Gold is a cultural heritage in India, and gold trading would yield lucrative results when trading is done meticulously. Online trading will keep risk management at a moderate level anyway.
Citation:
https://www.bajajfinserv.in/how-does-inflation-affects-the-price-of-gold
