Gold has been among the most precious metals in the world and its value as a commodity has been increasing since the past decade. Before, in many countries including India, gold was symbolic of being rich and powerful. Even during the times of kings and kingdoms, the prosperity of that kingdom was directly proportional to how much gold the king owned.
However, through the years, even after currencies were created that are in use today, gold serves many purposes in the economy which includes how it affects the value of these different currencies.
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Gold and its impact on the Indian Rupee
In India, gold is majorly imported from other countries. When the import of gold rises in a country, the currency of that country decreases and if the export is higher, the value of the currency is higher as well.
As the daily prices of gold differ and depend on the international market, if India is exporting more than it is importing, the value of the rupee will increase when the global gold rates rise. However, since India majorly imports its gold, when the global rates rise in the market, the value of the Indian rupee declines.
Gold Prices and Inflation
Apart from its adverse effect on fiat currencies, gold prices also have a direct effect on inflation in a country. If a central bank of a country imports gold, it does affect the demand and supply of the currency in the country. To import gold from another country, the central bank will be printing a larger number of notes to pay for it and due to a surplus of currency notes, inflation would be caused in the country.
The relation of Gold with Fiat Currencies
Fiat currency or the national currency of a country also may get affected by the value of gold. Since gold prices are affected by many factors, it may not always be the case where a rise in gold prices automatically means, a decline in the fiat currency of the country. Many times, the rise in the gold price may be a direct result of a higher demand created by an industry that uses gold as a primary product.
For example, in India, gold is majorly used in the industry of jewellery. Hence, during the wedding season in India, there is a surge in gold prices as the jewellery manufacturing industry creates a demand for precious metal. Hence, if the gold rate in Delhi is higher, it does not mean that the value of the rupee has gone down. It is simply due to a higher demand seen in the country.
Gold Prices and Hedging Inflation
As mentioned before in the previous section, high imports of gold may lead to inflation in a country. However, gold protects against inflation as well. Since gold is a commodity that is traded and invested in the market, the purchase of gold by investors helps in combating inflation in a country.
Due to this, most investors are more inclined to purchase gold when inflation is high as gold becomes a safe-haven and is more consistent in its value and prices. During inflation, the demand for gold is higher even though the supply is lesser. Hence, higher investments in gold will lead to higher demand which will ultimately result in higher gold prices in the country. This does help in flattening a weak trend of a country’s fiat currency in the market.
Gold Value and the U.S. dollar
Gold prices in India and the Indian rupee’s value are dependent on the U.S. dollar’s value in the international market. The gold rate in the market and its relation to the U.S. dollar is inversely proportional. If there is a rise in the U.S. dollar value, gold value decreases and vice versa.
To conclude, the gold rate today has an important role in impacting the value of the U.S. dollar, the Indian rupee along with impacting the inflation or deflation in the country.