Opportune time to stock up on gold as global inflation surges, rupee falls

The global surge in inflation has meant that investors are looking at safer options and one of the traditional havens during inflationary periods is gold. However, the international prices of bullion are $-denominated. So, the price of the yellow metal has not moved much because a strong $ puts a ceiling on the price. International prices have ranged around $1,700 an ounce, with a net drop of around 8 per cent in $-terms, in CY2022, after the US Fed hiked rates and the $ strengthened.

Nevertheless, a global scenario of persistent inflation should result in greater demand for gold, and eventually drive up prices. Due to the pandemic followed by the Ukraine War and repeated lockdowns in China, supply chains are likely to be disrupted for an extended period, and there is uncertainty about supply of essential commodities ranging from energy to the food basket to industrial metals. That means persistent inflation and this is the base case for buying gold.

In India two other factors could apply. This is the first normal or near-normal festive season after the pandemic struck and it’s also traditional for households to buy gold in this period. There could also be pent-up demand due to the low buying in the past two years. Also to be noted, the fall in the rupee has meant that gold prices have risen, by around 6-7 per cent in rupee terms.

In 2021, India imported 1,068 tonnes of gold, up from an abnormally low level of 430 tonnes in 2020, and around 837 tonnes in 2019. In earlier periods like 2015 and 2016, gold imports have generally been above 1,000 tonnes so 2021 was about normal. Gold-jewellery exports rose 50 per cent to $8.81 billion in 2021 compared to exports of $5.88 billion in 2020.

Between April-August 2022, India’s gold imports dropped 12.8 per cent in $ terms. In April-August 2022, India imported $16.38 billion of gold whereas it had imported $18.8 billion in the same period of the prior fiscal. The demand may have been impacted by the duty hike which was imposed from July 2022 though there are claims that some importers found a loophole that allows gold to be imported at lower duty as a “platinum alloy”.

The World Gold Council claims retail demand is strong, heading into the festival season. This is backed by the recent business update and guidance from Titan, which also claims strong demand. There is also anecdotal evidence that the dip in dollar denominated prices has led to higher demand from Asian buyers.

Is gold exposure worth holding given the scenario of persistent inflation? We have historical evidence that the metal holds its value in inflationary scenarios. If there is inflation for a long period, as seems likely, the metal usually gains in value even in $ terms. For an Indian investor this is also attractive since it could provide a hedge against a falling rupee. The RBI has increased its holdings.

Therefore it may make sense for asset allocation strategies to include a small gold component for retail portfolios. There have been some inflows into gold exchange traded funds(ETFs) and the sovereign gold bond scheme is also an alternative if investors wish to hold dematerialised exposures.