Gold Price Movement: USD vs INR

Tracking gold-price movements in terms of USD and INR is a simple, but intuitive way to understand the strength of our economy. Here are some observations from staring at the historical gold price movement in USD and INR. The domestic price of gold, that is INR is the  equivalent price in USD times the exchange rate.

This has resulted in some fascinating price movement. First, let us look at the normalised (all set to 1 at the start) movement of the price of one troy ounce (31.1 gms) of Gold in USD, INR and the exchange rate (per dollar) derived from these prices.

The data is from 2nd Jan 1979. The emergency had ended a couple of years ago and India was trying to strengthen its economy. However, the fiscal deficit and balance of payments were increasing. That is, India was importing more than it was exporting. It had no forex reserves and it was on the verge of defaulting on payments. This was at the start of the 90s. The IMF lent Indian 2 Billion USD with its gold reserve as collateral.

Notice how Gold (USD) kept going down for 20 years while Gold INR kept moving up!! A currency that was becoming weaker by the day is the reason for this.

Notice how rapidly the exchange rate increased, including some alarming jumps as the economy opened up.

The exchange began to plateau and then decrease for a while (not seen clearly enough above in log scale). Then after more than 20 years, Gold-INR began to track Gold-USD.

Notice that the movement in exchange rates after 2000-08 is relatively minimal relative to the period before that. The rupee was now stable as the GDP grew backed by corporate earnings and a strong bull run in the markets.

We have recently had hiccups with surge in gold imports, highly volatile rupee due to downgrade in Indias sovereign rating to just one rank below 'junk status' in early 2013. It is only in the last year or so that the rating outlook has turned to 'positive' from stable. This is in part due to reduced borrowing from citizens (rate cuts).

One crucial point we should remember is that when fixed income rates increase, it is not good news. It means the credit-worthiness of the country has come down! The rupee becomes weaker.

The 5-year rolling returns of Gold-INR and Gold-USD are compared below.


Notice that the extra returns in INR came because of the exchange rate movement. Any marked departure between the two long-term returns could well spell trouble for the economy. If 'reforms' do not result in higher corporate earnings soon, we may soon see  Gold-INR returns move higher than Gold-USD returns.

Gold monetization and the Sovereign Gold Bonds are ways by which the government aims to import less gold and ensure there is not another balance of payments crisis.

Should we hold physical gold just in case the economy collapses and the rupee becomes worthless? That hold gold as a hedge against currency risk? After all, we are only a stable economy, not a strong one.

If the answer is yes, just how much physical gold should be we have and in what form? If I need to use gold as a currency for everyday use, I better have lots of it. Meaning I need to accumulate enough now ignoring other asset classes and ignoring returns from my investment. Now that I do not find appealing enough.

This Investopedia article sums it up well:

By purchasing gold, people can shelter themselves from times of global economic uncertainty. Trends and reversals occur in any currency, and this holds true for gold as well. Gold is a proactive investment to hedge against potential threats to paper currency. Once the threat materializes, the advantage gold can offer may have already disappeared. Therefore, gold is forward-looking, and those who trade it must be forward-looking as well.

As mentioned above, tracking gold-USD vs gold-INR is a simple, but intuitive way to understand the strength of our economy.

More posts on gold:

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12 thoughts on “Gold Price Movement: USD vs INR

  1. Austin Joseph

    Nice Topic and something of my interest. Gold is certainly a hedge against Global Uncertainties and most certainly in an era of QE and low to negative interest rates and almost a 100 month cycle of growth fuelled by QE , we are now starring at recession that would be far worse then 2008 crisis because no solution to 2008 crisis was found , the Central Bank just resorted to artificial control of interest rates without real price discovery sort of ponzi scheme and now its a case of drug addict needing more and more drugs every day to stay alive till he dies of multi organ failure.

    Coming back to gold , if you hear Peter Schiff , David Stockman that dont parrot the main stream narrative then one should atleast keep 8-10 % of ones total asset in Physical Gold , Personally I would keep about 25 % but I know few who would keep as high as 90 %.

    What one must not do is

    Dont Invest in any Paper Gold ( ETF/Gold Fund ) etc they dont really mean any thing , Just buy physical gold if you buy/need gold.

    Dont invest in any GOI Gold Monitisation scheme , it just a good way to confiscate peoples real wealth for some paper trash.

  2. B

    Austin..i too prefer the idea of keeping physical gold vs any other forms of gold...however the 2% post tax return on paper gold (Sovereign gold bonds) is a big draw..specially for those with white money like us....

    1. Austin Joseph

      The 2 % you can always make on other source like stocks etc there is a process where the government checks for purity of gold including melting that is what I read.

      Any ways Gold is real wealth and every Indian knows that is the only thing left when push comes to shove , giving it to government who might even not return you back for 2 % is not worth the risk and yes we are talking of white money here and for salaried people.

      For institution like Temple etc it is fine they can keep that with GOI and earn the money if they wish too

    1. freefincal

      I am afraid I cannot simplify any further than GOLD INR depends on GOLD USD and exchange rate. If both gold prices move in the same direction, the rupee is strong. If they move in opposite direction,s the rupee is probably weak!

  3. Anand Vaidya

    I have receipts of gold purchases since 1998. So I did a XIRR calculation. XIRR works out to 4.3% .

    So not a very meaningful investment. Obvoiusly, I have stopped buying gold (2009) if at all I buy gold , I'd classify it as expense/consumption and never count gold as hedge etc,


    Sovereign gold bond listed. Today's value 3250...
    And you are still with historic values and graph.
    Still you dictate no,no,no....

    1. freefincal

      And I shall continue to say no because, regardless of market value (which is due to lack of supply), "On maturity, the redemption proceeds will be equivalent to the prevailing market value of grams of gold originally invested in Indian Rupees . The redemption price will be based on simple average of previous week’s (Monday-Friday) price of closing gold price for 999 purity published by the IBJA"

  5. Austin

    Depends how you peg the Gold , gold is pegged around $1,100-1200 per ounce , if you peg gold to $5000 or $10000 per ounce then lo behold you are looking at Gold at different levels.

    Gold Prices are artificially suppressed so that politician appetite for unlimited printing and undisciplined economy is satisfied as long as it can be.


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