Why are gold prices soaring?

Gold prices are increasing worldwide and in India. In March 2023, the price of the yellow metal crossed the Rs 60,000 mark for 10 gm 24-carat gold in India. As of May 15, 10 gm of 24-carat gold in India is estimated to be Rs 63,000. 

But why are gold prices soaring? 

Gold prices often soar when there's uncertainty in the economy. The current rally in gold prices is also a result of an uncertain global economy exasperated by several factors. 

Recession, banking and the Ukraine-Russia war have all affected gold prices.  

The Ukraine-Russia war:

• The Ukraine-Russia war has driven up the demand for gold worldwide. According to the World Gold Council (WGC), central banks of countries like India, China, and Russia have bought large amounts of gold reserves ever since 1967, when the dollar replaced gold as the reserve backup. 

• Turkey, India, Russia, China, Uzbekistan, and others have bought gold reserves for their respective reasons. Some say the trend was started by Russia. 
• Russia was locked out of its $600 billion in foreign reserves by the US and the EU in February 2022, when Putin invaded Ukraine. 
• Reports say this sent alarm bells ringing across the world with other countries worrying that if the West can do this to Russia, then they can also be targetted. 
• China is the most concerned, given its friction with the US. Hence, China has bought nearly 50% of the total gold reserves bought by the world's central banks recently. 
• Countries are stocking up on gold to diversify their holdings, not just because of the arbitrary influence held by Western countries, but also to hedge against the risks posed by their unstable economies.
• Additionally, some countries are buying gold in tonnes for cheap, thanks to Russia. Russia is the second-largest producer of gold, but due to Western sanctions, many US-allied countries are not buying Russian gold, making Russia sell its gold produce to countries like China for a discount. 

Factors Behind the Unstoppable Surge in Gold Prices.#GoldPriceToday #goldprices #goldpricehike #GoldPriceUpdate #Goldprice #StockMarket #StockmarketIndia pic.twitter.com/NQR39wWNKl

— Prithviraj Kothari (@PrithvirajRSBL) May 9, 2023

Devaluation of the dollar and US economy: 

• The dollar has been fluctuating rapidly due to the US economy. The collapse of banks in the US like the Silicon Valley Bank and Signature Bank is signaling trouble in the US financial market. 
• The collapse of other global banks such as Credit Suisse has also highlighted the drawbacks of relying too much on the dollar. 
• The call for de-dollarisation has been reignited in the wake of the Ukraine-Russia war and the unstable economies of countries like the US. 
• Though, this doesn't mean that countries have abandoned the dollar. Stocking up on gold reserves is more of a backup than a trade-in. 
• An interest rate hike by central banks, especially the US Federal Bank to calm inflation has increased fear among market participants of a possible global economic slowdown.

Gold is usually the safe-haven asset in times of crisis and with Central Banks and investors alike flooding their reserves with the precious metal and demand going up, the prices have soared.