Commodity Radar: At fresh peak of Rs 1.36 lakh, gold overbought. But 5 reasons why not to sell into strength

Gold, often termed a 'safe-haven asset,' has historically served as a reliable store of value, particularly during times of economic uncertainty and geopolitical instability. Its recent surge to a fresh record of Rs 1.36 lakh per 10 grams on the Multi Commodity Exchange (MCX) in India, pushing it into 'overbought territory,' underscores a significant shift in global investor sentiment and economic dynamics. This phenomenon is not merely a market fluctuation but a reflection of deeper economic undercurrents that have profound implications for India and the global financial landscape.

**Background Context and What Happened:**

Gold's allure stems from its intrinsic value and limited supply, making it a hedge against inflation and currency depreciation. The current rally is primarily driven by a confluence of global factors. Persistent inflation across major economies, exacerbated by supply chain disruptions and expansionary fiscal policies post-COVID-19, has eroded the purchasing power of fiat currencies, pushing investors towards tangible assets like gold. Geopolitical tensions, such as ongoing conflicts and trade disputes, further fuel uncertainty, prompting a flight to safety. Moreover, the monetary policies of central banks worldwide, particularly the US Federal Reserve's stance on interest rates, play a crucial role. While higher interest rates generally make non-yielding assets like gold less attractive, the current environment of high inflation combined with a potential pause or pivot in rate hikes can make gold appealing again. The article highlights that despite being 'overbought'—a technical indicator suggesting a short-term correction might be due—experts maintain a 'bullish' outlook, advising a 'buy-on-dips' strategy. This confidence is rooted in sustained global cues and robust central bank demand.

**Key Stakeholders Involved:**

Several key players influence and are influenced by gold price movements. **Individual and Institutional Investors** are primary stakeholders, using gold for portfolio diversification, wealth preservation, and speculative trading. **Central Banks** globally, including the Reserve Bank of India (RBI), have been significant buyers of gold, diversifying their foreign exchange reserves away from traditional currencies like the US dollar. This strategic move aims to enhance financial stability and reduce dependence on a single reserve currency. The **Jewellery Industry** is another major stakeholder, as India is one of the world's largest consumers of gold jewellery. Price volatility directly impacts demand, production costs, and consumer purchasing power. **Miners and Producers** benefit from higher prices, which increase their profitability and incentivize further exploration and extraction. Finally, the **Government of India** is a crucial stakeholder, managing gold imports, imposing duties, and implementing schemes to mobilize idle gold or offer alternatives to physical gold.

**Significance for India:**

For India, gold holds immense economic, social, and cultural significance. Economically, India is the second-largest consumer of gold globally, largely met through imports. High gold prices coupled with substantial import volumes can significantly widen the Current Account Deficit (CAD), putting pressure on the Indian rupee and foreign exchange reserves. To mitigate this, the government has introduced policies like the **Gold Monetization Scheme (GMS) in 2015** and the **Sovereign Gold Bond (SGB) Scheme, also in 2015**. These schemes aim to mobilize idle household gold and provide an alternative to physical gold investment, thereby reducing import dependence. Socially and culturally, gold is deeply embedded in Indian traditions, particularly for weddings and festivals, serving as a symbol of wealth, status, and security. It also acts as a crucial financial asset for many rural households, often used as collateral for loans. The government levies **Customs Duty** on gold imports, which is a significant revenue source, but also a tool to manage demand. The **Foreign Exchange Management Act (FEMA), 1999**, governs foreign exchange transactions, including gold imports, to ensure macroeconomic stability.

**Historical Context and Future Implications:**

Historically, gold has proven its mettle during crises, from the 2008 global financial crisis to the COVID-19 pandemic, often rallying when other assets falter. India's historical affinity for gold dates back centuries, with gold often serving as the primary form of savings and wealth transfer. Post-independence, stringent import restrictions were common until economic liberalization in the 1990s. Looking ahead, the bullish trend in gold is likely to persist as long as global economic uncertainties, inflationary pressures, and geopolitical tensions remain elevated. Central banks are expected to continue diversifying their reserves, further supporting demand. For India, this means continued pressure on the CAD if physical gold imports remain high. The government may need to explore further measures to encourage investment in financial gold products like SGBs and digital gold. The RBI's management of foreign exchange reserves, which includes gold, will be critical in maintaining currency stability. The trend also highlights the evolving nature of global finance, where traditional safe havens are regaining prominence amidst a complex and unpredictable global environment.

**Related Constitutional Articles, Acts, or Policies:**

While no specific constitutional article directly dictates gold prices, several acts and policies are crucial for its regulation and impact on the Indian economy:

1. **Customs Act, 1962:** Governs the levying of customs duties on goods imported into India, including gold, which is a key tool for managing gold imports and revenue generation.

2. **Foreign Exchange Management Act (FEMA), 1999:** Regulates foreign exchange transactions and controls, including the import and export of gold, thereby impacting its availability and price in the domestic market.

3. **Reserve Bank of India Act, 1934:** Empowers the RBI to manage India's foreign exchange reserves, which include gold, and to formulate monetary policy that indirectly influences investor sentiment towards gold.

4. **Gold Monetization Scheme (GMS), 2015:** A government initiative to mobilize idle household and institutional gold, reduce reliance on imports, and provide a fillip to the gem and jewellery sector.

5. **Sovereign Gold Bond (SGB) Scheme, 2015:** Offers an alternative to purchasing physical gold, providing investors with returns linked to gold prices and an additional interest component, aiming to shift demand from physical to financial gold.