10 Factors Affecting gold prices
Factors Affecting gold prices: Gold is one of the popular and most invested assets across different economies. It is considered a part of portfolio diversification as it helps in reducing the effects of sudden volatility in the market affecting the entire portfolio. And also helps in reducing the loses when the market is moving against us.
In India, gold investment has a different view. In addition to considering the gold investment as one of the safest investment options, a Large group of people consider gold as a symbol of prestige and status. It is considered an important element and people will buy the gold with pride.
The price of gold, in the long run, is always on the upward move giving consistent returns to the long term investors. But in the short term, the prices of gold keeps on changing every day. This is the major question among many people regarding what are the factors that affect the prices of gold. In this article, we will discuss all the factors that will affect the price of gold.
Factors affecting gold prices:
- Demand and Supply
- Central Bank of India
- Interest rates
- Import Duty
- Indian Jewellers market
- Government reserves
- currency fluctuations
- Geopolitical factors
Demand and Supply
It is obvious that any commodity or a good price will change based on the demand and the supply of that particular commodity. When there is a rise in the demand of the gold across then the price of the gold will increase and if the demand is more than the supply of gold, then there will be huge increase in the price of the gold. Over the years, the demand of gold is only increasing and has never decreased and hence the price of gold in the long run keeps on increasing.
When the stock markets are more volatile, then investors who wanted a safe investment will move to gold investment and since the rise in demand. Which will make the price of gold increase. And there are many similar situations and in such situations, if the demand increases then price increases.
Inflation is another factor affect the gold price largely. When inflation is high, it means that the value of a currency is falling. And hence people will not keep the currency in the form of gold. They invest their money in gold to safeguard the drop in value of a currency due to higher inflation. Gold is considered a good option for hedging against a drop in the value of a currency due to inflation
Central Bank of India
When the central bank of India decides to either Buy the gold or sell the gold, then the price of gold will be affected because there will be a change in the Demand and Supply of the commodity.
When the interest across the country is falling, then the price of gold will rise. The interest and the gold price have an inverse relationship in this case. When interest rates fall, it is not a good option to keep the free money in the bank as the returns are low sometimes less than the inflation prevailing. Hence people will chose gold as an investment option in such times and hence the demand increases and hence the price of the gold rises.
Particularly in India, the maximum demand for gold comes from rural India. Rural India contributes to a major share of gold purchases. Hence during that time of monsoon when there are returns for rural India, people will move to purchase gold and hence affects the price of the gold.
Majority of the gold that is available in India is imported from foreign markets. India has very less resources of gold available. Hence when there is an increase or decrease in the import Duty, then price of the gold will be adjusted to reflect the increased or decreased import duty. Thus import duty also affects the price of gold.
Indian Jewellers market
Indian households consider gold as a symbol of status and gold ornaments are a show of pride for may families. It is during the season of festivals and functions that people spend the major amount on gold Jewellery purchases and during that time the price of gold will increase to balance the increasing demand.
The government of India holds gold reserves at the RBI to meet any demands in the futures. The government at times performs transactions such as buying gold from the market or selling the gold in the markets. During such a transaction, the price of gold will be under pressure.
As gold is traded on the international market in US dollars, therefore, when US dollars are converted to Indian rupees during import, the price fluctuates. If the Indian rupee depreciates, gold import turns to be costlier.
During geopolitical turmoil, gold usually does well. During crises, various asset classes have a negative impact but there is a positive impact on gold as it acts as a safe haven for parking of funds.