Gold Monthly Review: Prices take a bull run as rupee weakens

September 03, 2023 (MLN): Domestic bullion witnessed a remarkable surge in August, driven by the continuous depreciation of the Pakistani rupee (PKR) and investors' shift toward risk-off assets.

24-karat gold closed the month at Rs239,800 per tola, marking a monthly increase of Rs17,600 per tola, or 7.92% MoM.

It is worth mentioning that domestic gold came close to its all-time high of Rs240,000, which was reached on May 10, 2023.

The boost in domestic gold prices can be associated with specific reasons:

PKR's Collapse

The Pakistani rupee (PKR) continued its decline against the U.S. Dollar and reached a new all-time low of 305.54 per USD.

In just a span of one month, the local unit lost 6.18% of its value against the US Dollar.

The pressure on the local currency is attributed to the removal of restrictions on letters of credit (LCs) which has led to an increased demand for dollars.

The International Monetary Fund (IMF) has established one of its conditions within the Staff Level Agreement (SLA), which stipulates the adoption of a market-determined exchange rate to help absorb external pressures.

Consequently, the government's ability to control the rupee through trade restrictions has been limited.

Since gold is denominated in U.S. dollars when the local unit depreciates against the greenback, the value of PKR-denominated gold rises.

Risk off assets over risk on assets

During the first half of August, domestic gold prices remained relatively stable as investors shifted towards risk-on assets in response to specific market developments.

However, the benchmark KSE-100 Index closed the month of August at 45,002 points, down by 3,032 points or 6.31% MoM.

Investors were in a state of disbelief and dismay due to deteriorating economic and political conditions, prompting a significant sell-off and inclined them towards risk-off assets, such as gold.

To note, this was the highest monthly decline in percentage terms since the Covid-19 pandemic.

Political and economic uncertainty

The political uncertainty surrounding the general elections led to turbulence in local markets, which in turn further supported gold prices

Moreover, the nation was hit by the steep rise in inflation on the back of surging electricity bills, petroleum prices, and food prices.

On a monthly basis, in July, the Consumer Price Index (CPI) surged by 3.5% MoM, a stark contrast to the 0.3% MoM decrease in June 2023.

In July 2023, the current account balance plummeted to a negative $809 million, following four consecutive monthly surpluses. This highlights the volatility and uncertainty in the economic landscape.

These uncertainties sparked investors' interest in safe-haven assets.

International markets

The rise in international prices also boosted the appreciation in the domestic market.

On the global front, international spot gold ended the week with a 1.33% increase at $1,939.9, with a weekly high of $1,953.06.

International spot gold chart

This marks the second consecutive week of appreciation in gold prices.

Conversely, international spot silver went down by 0.18% to close the week at $24.18.

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