Gold is not just a top choice for ornament-making in India but also for investments. Given the high liquidity ratio of the asset and its inflation-proof price structure, gold remains a preferred choice among Indian investors hedging market volatility.
While the prices of gold have doubled over the last five years, like all investment vehicles they tend to experience period fluctuations. As an investor, you need to know what causes these price swings to protect yourself from fluctuating gold rates in Chennai and other cities.
Factors Influencing Gold Prices
Demand and Supply: The world has a finite reserve of this precious yellow metal. Thus, any change in the supply or demand side of its equation will have an impact on prices. For instance, during the wedding season in India, the demand for gold reaches an all-time high. If the supply doesn’t meet this high demand, the price of gold in Mumbai and other Indian cities will go up. Conversely, if the disposable income is low and supply outstrips demand, gold prices will fall.
Inflation: Since gold is often used as a hedge to mitigate inflationary pressures, gold rates in Mumbai and other cities are closely linked to inflation rates. When inflation is high, fiat currency is devalued. In other words, the purchasing power of currency notes reduces. However, since gold is a store of value, people tend to look to gold for savings. Higher demand for the asset spells higher prices.
Market Volatility: Any form of a market crisis triggered by geo-political or economic events impacts the gold rate in Chennai and other Indian cities. For instance, if investors see a palpable bearish trend in the stock market, they might wish to migrate to the safe-haven asset – gold, raising its price. Alternatively, a strong bullish trend in the stock market will lower the demand for gold as investors look to exploit higher returns from stocks.
Exchange Rate: India meets its gold demand through imports. Depreciation of the Rupee to the Dollar raises gold prices in cities like Mumbai, Kolkata, and others. In other words, gold prices in India will rise as the Dollar grows stronger.
Crude Oil Prices: Crude oil is an essential component of gold mining. So, the higher the price of crude oil, the higher the cost of gold production and the higher its market price.
Apart from these factors, others like RBI reserves, interest trends, the weakening Dollar, and the wedding season affect gold rates in Chennai and other Indian cities. To protect your gold investment from ups and downs, you can track these factors to gauge price movements and minimize losses.
Offsetting the Effects of Gold Price Fluctuation
Tracking these factors isn’t always easy. It’s always better to have a foolproof plan in place. To do so, you can implement the following precautions that’ll help offset the impact of gold price fluctuations.
Portfolio Diversification
Hedging market-linked risks means distributing your eggs in multiple baskets. In other words, you should diversify your holdings to avoid gold rates in Mumbai and other cities impacting your portfolio adversely.
You can mitigate the risks associated with the gold market by having a balanced mix of asset classes in your portfolio (like stocks, mutual funds, and bonds),. Not just that, you should also frequently rebalance your portfolio to ensure that it’s keeping with the current market trends.
Gold Mutual Funds
Instead of passively waiting for gold prices to affect you, you can monetize these changes to your benefit with gold mutual funds. You can use the rising gold rate in Mumbai and other cities to earn returns by investing in these funds.
These mutual funds invest in physical gold, gold ETFs, stocks of gold mining companies, and distribution companies via direct and indirect routes. Usually, even a tiny change in the gold prices can change the return value of these MFs significantly. Sometimes returns from the funds even outgrow the actual price of the metal.
Sovereign Gold Bonds
You can also balance out fluctuating gold prices by opting for government-issued sovereign gold bonds. While these bonds are certificates issued against grams of gold, they come with a set return rate.
Investing in such bonds ensures lucrative payouts as the government issues an interest of 2.50% p.a. to the investors, credited on a half-yearly basis. Moreover, if market trends suggest a fall in gold prices, you can always sell these bonds before the end of the 8-year tenure.
Digital Gold
E-gold can be yet another price risk management vehicle you can add to your portfolio. You can purchase digital gold from apps starting from just 1 gram. You can leverage real-time gold rates to exploit price movements. Thus, you can sell the asset to churn out a profit when gold rates in Mumbai and other cities rise or purchase more units when prices are low.
Bottom Line
While you can never go wrong with gold investments, every investment strategy has its own pros and cons. To decide which one fits you best, you should always consider your investment goals, time horizon, and approach. For instance, long-term investors can look at SGBs, while those with short-term goals might find gold funds and ETFs more profitable.
Regardless of your approach, the bottom line is clear: portfolio diversification. While keeping a close eye on the factors affecting gold prices can help you hedge risks, portfolio diversification is the only way to offset price risks.
