Why is gold turning better investment option in India than US dollar?

New Delhi: According to media reports, India's capital expenditure is all set to increase by around 8-10 per cent for the fiscal year, from the Rs 11.11 lakh crore allocated in the interim budget, which makes gold an attractive option for investment in the coming days. The Indian jewelry industry is demanding a cut in import duty on gold to 10 per cent from the current 15 per cent from the Union government in this year's budget.

It is believed that if import duties are reduced, Lower prices could drive higher consumer demand and increased demand would lead to higher sales volumes and benefit the companies involved in the trade as well. The major factors that make gold attractive depend on the strength of the US Dollar, the Interest rate in the market, and the economic condition in the country. 

A weakening Dollar strengthens Gold

A depreciation in the U.S. dollar, often caused by inflation, makes gold a more attractive investment. This is because gold retains its value over time, acting as a hedge against inflation that erodes the purchasing power of currencies. In India, the rupee's exchange rate with the U.S. dollar impacts gold prices. A weakening rupee against the dollar can lead to a decrease in gold prices.

Interest rates and gold's appeal

Rising interest rates make gold less enticing. Investors seek interest-bearing assets like bonds when returns rise, reducing demand for non-interest-bearing gold. Additionally, higher interest rates can stifle economic activity, lowering industrial demand for gold. Conversely, falling interest rates can increase gold's appeal as traditional investments offer lower returns. Lower interest rates may also stimulate economic activity, boosting gold demand in the jewelry and manufacturing sectors. With low or negative real interest rates, the opportunity cost of holding non-interest-bearing gold diminishes, making it more attractive.

Inflation's role in investment in gold

 During inflation, gold is seen as a way to preserve wealth. As the value of currencies declines due to inflation, gold's price tends to rise. Gold is rightly known to be the best storage metal.

 Gold is viewed as a safe-haven asset, particularly in periods of economic instability and high inflation. When the purchasing power of their money is threatened, investors may flock to gold, driving up demand and price as no one knows what tomorrow might hold.

A simple rule of supply and demand

Inflation can also influence gold's supply and demand. For example, if inflation spurs higher demand for gold jewelry or industrial applications, it can put upward pressure on prices.