The enduring symbol of wealth and prosperity, gold, has once again captured the spotlight as its value surged in response to the ongoing conflict between Israel and Palestine. The yellow metal witnessed a remarkable intraday rise of ₹1497 per 10 gm on the Multi Commodity Exchange (MCX) on October 13. The gold futures contract for December expiry on MCX concluded 2.58% higher at ₹59,415 per 10 gm, indicating the renewed interest in the precious metal.
This trend in gold’s performance echoes back to the Russia-Ukraine war that unfolded in February 2022. In the midst of this conflict, Indian gold prices saw an increase of around ₹1000/10 grams on March 7, 2022. The 22-carat gold prices were quoted at ₹49,400/10 grams, while the 24-carat gold rates stood at ₹53,890/10 grams.
The question looming now is whether this rally in gold will persist and for how long. Can the Israel-Hamas conflict further boost gold prices?
Gold’s allure during times of economic distress is well-established, as investors tend to turn to it while shunning riskier assets. It serves as a hedge against worst-case scenarios, akin to insurance. The ongoing conflicts between Ukraine-Russia and Israel-Palestine have the potential to disrupt long-term geopolitical balances, global supply chains, and trust in financial instruments.
To mitigate such risks, investors are increasing their allocation to the precious metal. A significant aspect is that in such doomsday-like scenarios, investors often prefer physical gold over sovereign-backed gold securities.
This preference arises from the fact that sovereign-backed gold is essentially a promissory note by the government, as highlighted by Anshul Gupta, Co-Founder and Chief Investment Officer at Wint Wealth.
The Influence of Geopolitical Conflict on the Price of Gold
In contrast to its strong performance in 2021 and 2022, gold has faced a relatively lackluster year thus far. Strong rallies in equities and attractive bond yields have diverted investors away from gold towards other assets, notes Alekh Yadav, Head of Investment Products at Sanctum Wealth.
However, the Israel-Palestine conflict and the heightened geopolitical risks are driving a rethink. Investors are considering an overweight allocation to gold due to its historical role as a hedge against geopolitical risks and equity market volatility.
Gold investments have garnered increased attention for diversifying portfolios and ensuring financial stability.
The Factors Behind Gold Price Volatility
One of the primary reasons for turning to gold is its status as an effective hedge against inflation and economic uncertainty. Inflation erodes the purchasing power of traditional currencies, making fixed-income investments less appealing.
Gold, on the other hand, often preserves its value during periods of inflation, thus safeguarding investors’ wealth. Additionally, during economic crises, gold experiences heightened demand as a safe-haven asset, as emphasized by Mahendra Luniya, Chairman of Vighnaharta Gold Ltd.
The fluctuations in gold prices are shaped by various factors, including global gold demand, currency fluctuations, interest rates, and more.