- How and why gold prices are rising
A common refrain we often hear from our grandparents or parents is how they could purchase a sovereign of gold at a remarkably low price (which, in hindsight, was indeed substantial in their era), equivalent to what we might spend on a tuk-tuk ride today or a simple meal. Similarly, when an item is excessively expensive, it is not uncommon for buyers to jestingly inquire: “Is it made of gold?”
Gold has perennially stood as a symbol of affluence, maintaining its status as a precious commodity throughout the ages. Hence, gold remains a favoured investment avenue in Sri Lanka. Across all segments of society, whether urban or rural, financially savvy or less so, young or old, it is widely recognised that gold prices have consistently surged in Sri Lanka. Indeed, one cannot procure a sovereign of gold for the same price twice. Moreover, the allure of substantial returns on gold investments renders it an enticing option for safeguarding one’s savings.
Current trend of gold prices
As per data currently available, the price of one sovereign of 22-carat gold stands at Rs. 190,000 as of Thursday (25). Contrasting this with the same period last year reveals a significant increase, with prices ranging between Rs. 150,000-160,000 per sovereign of 22-carat gold. Figure 1, crafted from data sourced from the Central Bank of Sri Lanka (CBSL), provides a precise illustration of the price trend over the past year.
The y-axis represents the price of gold per troy ounce in terms of Sri Lankan Rupees. For context, a troy ounce is a historical unit of measure for precious metals, dating back to the Middle Ages. Originating in Troyes, France, one troy ounce is equivalent to 31.1034768 grammes, as per the UK Royal Mint. Notably, one sovereign contains 7.98805 grammes, providing a reference point for those familiar with this traditional measurement.
Figure 2 displays the trend in gold prices over the past decade.
Returning to the current surging trend, it is essential to recognise that this upswing is not confined to Sri Lanka alone. Gold is a globally-renowned commodity, highly sensitive to fluctuations in the global market. According to the India Bullion and Jewellers Association (IBJA), the price of 10 grammes of 999 gold (24 carat) is projected to reach INR 74,000, having already climbed to INR 73,477 on 18 April. This significant increase marks a near-threefold rise over a span of more than nine years, as the price stood at INR 24,740 in 2015.
Factors behind the current trend
Frontier Research Macroeconomic Advisory Head Chayu Damsinghe told The Sunday Morning Business that local gold prices were significantly influenced by global factors.
“Commodities like gold are sensitive to global factors such as global inflation, interest rate changes, and geopolitical factors. For the prices to stabilise, the global conditions have to be favourable,” he added.
According to Damsinghe, another factor that might play a small role in bringing down gold prices is the appreciation of the local currency. Because gold prices are often quoted in US Dollars globally, a stronger Sri Lankan Rupee would mean that it takes fewer rupees to purchase the same amount of gold. As a result, the cost of importing gold would decrease, leading to lower prices for consumers.
However, it is essential to consider that gold prices are influenced by various factors, including global demand, geopolitical events, inflation rates, and investor sentiment. Therefore, currency fluctuations are just one of many factors affecting gold prices.
Delving deeper into the external factors, global reports indicate that investors’ anticipation of a cut in the US Federal Reserve’s benchmark interest rate is the primary force propelling prices upwards. However, this surge is further fuelled by other factors, notably, the actions of central banks, spearheaded by China, which are actively purchasing gold to lessen dependence on the US Dollar. For central banks, gold represents a long-term store of value and a safe haven amid economic and geopolitical uncertainties.
The increasing demand for gold by central banks signals a diminishing reliance on the dollar, as noted by Currency Research Associates Chief Executive Officer (CEO) Ulf Lindahl. According to a March research note from J.P. Morgan, countries not aligned with the US may be accumulating gold as a strategic move to divert from dollars, thereby reducing their susceptibility to sanctions.
In a recent note, renowned economist and Rosenberg Research President David Rosenberg described the latest gold rally as “especially impressive”. He noted that gold had outpaced not only bitcoin and every major currency but had also defied typical macroeconomic headwinds that tended to suppress its value.
Rosenberg’s team highlighted that the surge in gold prices had occurred despite a backdrop of dollar strength, declining inflation expectations, and the Federal Reserve’s indication of a ‘higher-for-longer’ interest rate stance. These developments would typically exert downward pressure on prices, but gold has continued to advance nonetheless.
According to Goldman Sachs, gold’s relative stability following last week’s stronger-than-expected US Consumer Price Index (CPI) serves as further evidence that the metal’s bull market is not solely propelled by typical macroeconomic factors.
How is the forecast looking?
In a research note, Citi stated that ongoing uncertainty could persistently bolster gold prices. Additionally, analysts at Berenberg suggested that a potential victory for Donald Trump in the US Presidential Election would enhance the prospects for gold.
Goldman Sachs has revised its gold price forecast upward to $ 2,700 per ounce by year-end, compared to its previous target of $ 2,300. The brokerage firm asserts that the yellow metal was entrenched in an unshakable bull market.
Figure 1: Price of gold per troy ounce from May 2023 to date (Rs.)
Source: CBSL
Figure 2: Price of gold per troy ounce over the past decade (Rs.)
Source: CBSL