Recent Relevance: In January, 2019, the price of gold in the Indian market reached its highest-ever level, hitting the Rs. 33,800 mark in Mumbai in the midst of increasing demand from buyers and lagging supply in the global market.
It is not just the rupee that is witnessing a fall in value against gold. A similar trend has been seen in the price of other major emerging market currencies as well when their worth is measured against the yellow metal.
Why is it a concern?
The increase in the price of gold worldwide should be seen against the backdrop of rising uncertainties that threaten to derail the global economy. Western central banks have been tightening their monetary policy stances for a while now, leading to increasing fears that this could put an end to the decade-long recovery since the 2008 Global Financial Crisis. The U.S. Federal Reserve has been at the forefront of the current tightening cycle.
Gold prices as an indicator
The trade and price of gold can be an indicator of the state of the world economy. The increased flow of capital from emerging markets to the West has put pressure on various emerging market currencies. The rupee, for instance, has depreciated significantly in value against the U.S. dollar in the last year alone. This probably explains the divergence in the performance of the dollar vis-à-vis other emerging market currencies against gold. The U.S.-China trade war and the lowered rate of Chinese economic growth have added to fears of a global economic slowdown. Furthermore, as stock markets around the world continue to trade sideways with increased volatility, investors seeking financial safety have turned to gold and boosted its price. Many central banks have been trying to hoard gold to restore confidence in their currencies. According to the latest report by World Gold Council (WGC), central banks bought 651.5 tonnes of gold in 2018, which was 74% higher than the previous year and also the second highest yearly total on record.
The depreciation in the value of national currencies against gold is also an indication of the increase in inflationary pressures across the globe. The surge in central bank buying gold can be related to concerns of slowdown in global growth, heightened geopolitical tensions, and financial market volatility.
Categories: POINT IAS