Why India’s gold has outperformed global prices

The depreciation in rupee has cast a huge impact on the escalation of gold prices as it makes imports costlier.

Last Updated: Aug 30, 2013, 08:32 AM IST

Ajeet Kumar/Reema Sharma

Gold price hits fresh all-time high of Rs 35,074 per ten grams in futures trade on Wednesday on heavy buying as rupee plunged to its new record low of 68.85 against the US dollar.

Despite recovering about USD 240 an ounce, or more than 20 percent, since hitting a near three-year low of USD 1,180.71 in late June, gold prices are still down 15 percent so far this year in international market. On the contrary, the yellow metal, which plunged to a low of Rs 25,000 in mid-April, is at a record high in India.

Here’s looking at why gold price in India is spiralling:

Rupee depreciation: The depreciation in rupee has cast a huge impact on the escalation of gold prices as it makes imports costlier. Rupee is down nearly 19 percent so far this year. Hence, gold price in India cannot be at parallels with the price in international market. The difference arising out of the depreciation in rupee has pushed the gold prices higher.

Gold import duty:Gold import duty has also added fuel to the rapidly increasing gold price. In order to contain the widening Current Account Deficit (CAD), the government this month hiked the import duty on gold from existing 8 percent to 10 percent, which has led to a straight jump of more than 600 per 10 gram in gold prices. Prior to this hike, the government had twice hiked import duty from 4 percent to 6 percent and 8 percent respectively.

Geo-political tensions: Geopolitical tensions in Syria are one of the reasons that have immediately triggered the hike in gold prices. Analysts believe that the possibility of US military action against Syria is driving demand for safe-haven assets including gold. Speculations are also doing the rounds that Fed might delay tapering of its bond buying programme if US forces attack Syria.

Low-level demand/ETF buying: In the last two weeks, SPDR gold trust, the world's largest gold-backed exchange-traded fund, has reported inflow, signalling renewed interest of market players. Apart from ETF buying, low-level buying also stoked up prices.

Central Bank’s buying: International Monetary Fund (IMF) data has showed that central banks continued to add to their gold reserves. Turkey added the most by buying 22.5 tonnes of gold in July, while Russia's holdings topped 1,000 tonnes. The accumulation of gold by the central banks has underpinned demand for gold, which in turn has strengthened the metal’s price.