Gold has always held a special place in South Asian cultures, particularly in India, where it is valued not only as a symbol of wealth and prosperity but also as a secure investment. Recently, India reduced its import duties on gold and silver to 6% from 15%, the lowest level in over a decade. This move is expected to boost retail demand and curb smuggling in the world’s second-largest consumer of these precious metals.
According to a report by Goldman Sachs, retail buying in Asia, including India, has fueled gold price momentum. The report highlights that retail demand for gold has been strong, with increased buying observed across the region. Understanding both traditional and modern methods of investing in gold can help investors make informed decisions.
Traditional methods of investing in gold
In South Asia, the allure of gold extends beyond its glitter. It is deeply ingrained in cultural practices and traditions. Physical gold, in the form of bars and coins, remains a popular investment choice. This tangible form of gold is often considered a safe-haven asset, particularly in times of economic uncertainty. The sense of security that comes from holding a physical asset is unmatched, especially in regions where gold has historically been a store of value.
Gold jewellery, another traditional investment, serves a dual purpose. In many South Asian families, gold jewellery is not just an adornment but also a significant financial asset. It is often passed down through generations, retaining its value over time. This practice highlights gold’s enduring worth and its role as a cherished heirloom. Additionally, gold savings schemes offered by jewellers provide a structured way for individuals to accumulate gold over time. These schemes are designed to encourage regular saving and investment in gold, making it accessible to a broader population.
Modern methods of investing in gold
While traditional methods remain popular, modern avenues for investing in gold are gaining significant traction due to their convenience and accessibility. Gold exchange-traded funds (ETFs) provide an efficient way to invest in gold without the need to store physical gold. These ETFs track the price of gold and can be easily bought and sold on stock exchanges, offering liquidity and flexibility for investors. Similarly, gold mutual funds invest in a diversified mix of gold mining companies and physical gold, allowing investors to benefit from the overall performance of the gold market without directly handling the metal.
Digital gold platforms represent another innovative approach, enabling investors to buy and sell gold in small quantities online. This method makes gold investment accessible to everyone regardless of their budget, and eliminates the need for physical storage, as the gold is securely held in vaults by the service provider. Additionally, modern trading platforms offer the ability to trade gold contracts for difference (CFDs). CFDs allow investors to speculate on the price movements of gold without owning the physical asset, providing opportunities for profit from both rising and falling markets.
Another advanced method includes the use of automated trading systems and algorithms, which can execute trades based on predetermined criteria and market signals. These technologies enable investors to capitalise on market opportunities and manage risks more effectively, often with minimal manual intervention.
What impacts gold prices?
Global events significantly influence gold prices, with political changes and economic policies creating considerable market volatility. For instance, during the 2020 U.S. elections, which led to some political uncertainty, investors showed increased interest in gold as a safe-haven asset. In the week leading up to the election, gold was trading at around 1,900 USD, although it fell as low as 1,867 USD on 30 October. After the election, the gold price spiked from 1,908 USD on the day of the vote to 1,951 USD on 6 November. Such political events, coupled with economic policies, play a crucial role in driving the price of gold, as investors often seek safe-haven assets during times of uncertainty.
The dynamics of the global economy also impact gold prices. Factors such as inflation, currency fluctuations, and central bank policies can lead to significant price movements. For example, during periods of high inflation, gold prices tend to rise as investors look to protect their wealth. According to the World Gold Council, in 2021, inflation rates soared globally, and gold prices responded by increasing approximately 6% over the year.
Currency fluctuations also play a vital role in gold pricing. When the U.S. dollar weakens, gold becomes cheaper for buyers with other currencies, increasing demand and driving up prices. In contrast, a strong dollar can suppress gold prices. In 2022, the U.S. dollar index reached a two-decade high, which put downward pressure on gold prices. The WGC report indicates that a strong dollar, combined with rising interest rates, led to an 18% drop in gold demand in the fourth quarter of 2022.
Central bank policies are another significant factor. When central banks, particularly the Federal Reserve, change interest rates, it impacts the opportunity cost of holding gold. Lower interest rates typically make gold more attractive, whereas higher interest rates can make gold less appealing, as it yields no interest. In response to the Fed’s aggressive rate hikes in 2022, gold prices experienced volatility, highlighting the sensitive relationship between monetary policy and gold valuations.
Additionally, geopolitical tensions and economic crises can lead to surges in gold prices as investors flock to the perceived safety of gold. For example, during the global financial crisis of 2008, gold prices surged by nearly 25% as markets collapsed and investors sought stability in gold. Similarly, the COVID-19 pandemic in 2020 saw gold prices hitting an all-time high of over 2,070 USD per ounce in August, driven by widespread economic uncertainty and unprecedented monetary stimulus measures.
Expert insights
Kar Yong Ang, a financial market analyst at Octa Broker, shares his insights on gold investment: ‘The dynamics of the gold market are influenced by a myriad of factors, including geopolitical events, economic policies, and market sentiment. Currently, the reduction in import duties by India is expected to bolster retail demand, positioning gold as an attractive investment. Additionally, the interplay between global economic policies and investor behaviour continues to create opportunities for those looking to hedge against market volatility.’
Looking ahead, Kar Yong Ang predicts that gold prices could experience upward pressure due to continued global economic uncertainty and potential inflationary pressures. Investors should keep a close eye on central bank policies and geopolitical developments, which are likely to be significant drivers of gold prices in the coming months.
Conclusion
Gold continues to be a valuable investment option in South Asia, offering both traditional and modern methods to suit different investor needs. The reduction in India’s import duties is expected to further boost the retail demand for gold, making it an opportune time for investors to consider gold as a viable investment option. The growing interest in gold investment underscores the momentum in gold prices driven by robust retail buying in Asia.
As global economic uncertainty persists, gold remains a reliable hedge against market volatility. Modern investment methods such as ETFs, digital gold platforms, and CFDs provide convenient and flexible ways to invest in gold, making it more accessible than ever before.
By leveraging the various tools and resources available, investors can navigate the complexities of gold investment with greater confidence and precision. Gold’s enduring appeal, coupled with innovative investment approaches, ensures that it remains a versatile and robust choice for safeguarding and growing wealth in South Asia.
