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Image Source: Pixabay
Image Source: Pixabay

Economy

Soaring gold prices. What’s causing it?

Gold, one of the major import commodities of Nepal, is hitting new price records since the last few weeks. Know the reasons behind.

By the_farsight |

It’s wedding season in Nepal when the families of the couples getting hitched usually invest heavily in gold ornaments but the yellow metal that has been hitting new price records is making buyers nervous. 

A tola of gold, which is equivalent to 11.66 grams, was Rs 78,000 on 1st March 2020 — 10 days before the declaration of the COVID-19 pandemic by WHO — now costs almost Rs 110,000.  

So what has caused the gold prices to hit the roof?

First, the international reasons.

Gold is regarded as one of the safe investment havens and even a hedge against inflation, deriving its value from serving functions — as a monetary instrument (although gold doesn’t fully serve the monetary quality akin to paper currency), a financial asset, and as a raw material for making jewelry ornaments and other decorative objects. To add to that, the value of gold usually remains immune to government interest rate policies.  

For all these reasons, investors throng to gold when market slumps occur for reasons such as recession, geopolitical strains, and financial instability. 

For instance, uncertainty surrounding COVID-19 led the price to a peak of Rs 103,500 per tola on 7th August 2020, breaking the six-digit threshold in the domestic market for the first time, which later dropped to Rs 85,600 per tola in March 2021. 

In recent times, with the collapse of Silicon Valley Bank and Signature Bank in the US and the news of the Swiss bank Credit Suisse bailed out by Swiss financial giant UBS, investors are once again taking the safety flight to gold driving the demand for gold and pushing up its price. On 24th January 2023, the price hit Rs 106,300 per tola which reached Rs 109,200 per tola on 31st March.

Prior to this, the Russia-Ukraine conflict and rising inflation in the global economy already had a significant price effect.

Some market watchers believe the price of gold will continue to grow over the next months.

Now, the domestic factors.

Gold is one of the major import commodities after petroleum products; other machinery and parts; transport equipment, vehicle, and other vehicle spare parts — its share in total imports stood at 3.4%, says the seven-month NRB data of the present fiscal year.

The final figures presented here include the sum of i) Gold, ii) Other unwrought gold, and iii) Gold and jewelry of Gold, including parts, as categorized in the Department of Customs dataset | Source: Department of Customs

The gold import accounted for Rs 43.68 billion in the fiscal year 2021/22, which has already reached Rs 36.90 billion by the eight months of the present fiscal year 2022/23.

On every 10 grams of gold imported, the government levies a custom duty of Rs 8,500 — generating a significant chunk of revenue for the national treasury. 

However, as the burgeoning import has implications for the country's foreign exchange reserves, the central bank adjusts the daily gold import quota when forex reserves are about to hit the red zone. In April 2020, the NRB reduced the daily gold import quota from 20 kg to 10 kg but reinstated the previous quota level back to 20 kg the next year in April as a response to the growing demand for gold.

The daily gold price is set by the Federation of Nepal Gold and Silver Dealers Association based on international market price fluctuations and other variables. 

Gold prices are also affected by exchange rates — meaning every time the Nepali currency devalues, it takes more rupees to buy gold, which in turn increases the price of gold.

the_farsight :)

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