What are the factors affecting gold pricing?

Gold has been one of the most traditional forms of investment. Before Indians knew about fixed deposits or stock markets or mutual funds, buying gold was one of the preferred means of investing.

Gold has always had relevance and continues to be so since it was used as a status symbol during weddings and festivals. It is also the easiest liquid investment to encash during difficult times. And in rural India, gold is still most popular since it is considered most liquid , can be easily leveraged with a local money lender, and can be encashed at any time.

In recent months, gold prices have been on a constant rise. And after the crash in March 2020 due to the Covid led lockdown, Gold had managed to surge and cross the Rs. 50,000 mark in July 2020. We took a long look at why the gold prices were increasing? What are the factors that affect gold prices? Read More

Factors Affecting Gold Prices

While a lot has been said about the main factors that affect the stock markets, many investors are oblivious to what causes gold prices to rise or fall. Here are some common factors that cause a change in price:

1. Demand and Supply

As is true with any traded commodity, the demand and supply of gold, plays an important role in determining its price. Unlike oil, gold is not a consumable product. All the gold that has ever been mined is still available in the world. And, every year, the amount of gold mined is not very high. And so, if the demand for gold increases, the price increases since the supply is relatively scarce.

2. Inflation

When inflation rates rise, the value of the currency decreases. Also, most other investment avenues fail to deliver inflation-beating returns. And if high inflation lasts, gold acts as a perfect hedge since it is not affected by fluctuations in the value of the currency.

3. Interest Rates

When interest rates fall, people don’t get good returns on their deposits. Hence, they tend to break their debt investments to buy gold causing an increase in demand. But, when the interest rates rise, people sell their gold and invest in deposits to earn higher interest leading to a drop in demand and price.

4. Indian Jewelry Market

In India, jewelry is the “gold” standard in Weddings, Diwali and Dhanteras. That is why, during wedding season and these specific festivals, the demand for gold increases. Read More

5. Government Reserves

The Government of India holds gold reserves. Based on its policies, it can buy or sell gold through the Reserve Bank of India (RBI). The price of gold can get impacted depending on whether it buys or sells more of this commodity.

6. Import Duty

India produces less than 1% of global gold. But, it is the second-largest consumer and therefore imports a large amount of the precious metal. Import duty plays an essential role in the price of gold.

7. Currency Fluctuations

Internationally, gold is traded in US Dollars. Any fluctuations in the USD- INR rate can affect the import price of gold.

My view is that you should remain balanced. I recommend 3 % to 5% allocation in gold as a hedge in portfolios based on your financial plan and asset allocation, with 5 years+ investment horizon.

Gold is a great hedge in the portfolio and will give moderate returns, giving you slightly higher than FDs, maybe 2% to 3% more , over a 5-year period, but definitely lower than equities. Asset allocation is the key to success in returns for all asset classes. Talk to our advisors to figure out what you can devote safely to this asset class to minimize your financial risk and maximize your financial planning