Market Factors That Drive the Price of Gold

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Gold investment is the favorite investment avenue of all Indians, specially for women and business families. However, if you look at the graph below you will notice that the returns on gold too have not been consistent. While investors made above 100% return in every 5 years period between 2002-2007 and 2007-2012 but the next five year period i.e. 2012 -2017 resulted in a loss of around 6%. With the help of this article we will make you understand the factors that drive the price of gold.

Gold investment returns

Factors affecting the price of Gold in India:

Supply of Gold
The world’s gold production affects the price of gold. Gold mine production has been in a decline since the early 2000s. One factor is that all the “easy gold” has already been mined; miners now have to dig deeper to access quality gold reserves. The fact that gold is more challenging to access raises additional problems: the miners are exposed to additional hazards, and the environmental impact is heightened. In short, it costs more to get less gold. These add to the costs of gold mine production, resulting in rising gold prices.
 
The value of Indian Rupee (INR) vs US Dollar ($)
For example: If in Year 1, we could buy $1 for INR 70 and and in Year 2 we can buy $1 for INR 60 only, this would mean that the value of INR has appreciated. In such case the value of Gold in India will decrease proportionately (if other factors are constant). This is because price of gold is fixed in terms of $ internationally.

Inflation
Inflation results in reducing the value of currency and any reduction in value of Indian currency will result in increase in price of gold. For example, if in Year 1 the inflation is 3% and it increases to 8% in Year 2, this will result in reduction in purchasing power of money in India so, buying gold will become costlier in India.

War and Political Stability
Gold is considered to be the safest asset when the global economy is facing war threats or if there is domestic political instability. People turn more towards gold than other investment options in such scenarios, this may result in huge increase in gold prices during the times of distress.

Economic Recession/ Crash of Stock Market
Economic recession comes with distress in stock market. So, when stock market starts crashing people exit the volatile positions and start looking for safe heaven. Gold market is the safest option available to such investors. Such trends result in inorganic growth in gold prices. However, if the bulls in the stock market gain momentum large number of investors may switch back from gold to stock market, resulting in fall in gold prices.

Marriage Season / Festive Season
Marriages in India are incomplete without exchange of gold as gifts. A trend has been observed as per which the price of gold appreciates by nearly 10% just before the wedding season. Similar appreciation is seen during festive season like Dhanteras and Diwali in India. However, it is also true that price of gold tend to normalise post wedding season and festive season.

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Author:

Sahil Goel | LinkedIn

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