12 Factors Affecting Gold Prices

Gold is always considered as a very important monetary asset across the world. Indians consider it as a symbol of wealth and status. They are emotionally attached to gold as it has been used as status symbol in weddings and occasions, it also adds religious sentiments.

In India, gold is one of the most favored forms of investment. Gold is always perceived as a safe investment that will help to recover from any financial crisis.

Many questions may come to your mind like what factors affect gold prices or what are the factors influencing gold price. So, let’s check and learn about it below.

What affects gold prices?

Demand for gold is interwoven with culture, tradition, desire for beauty and financial protection in India. Also, India is one of the largest consumers of gold.

There are various factors affecting the price of gold. Let’s look at some factors below:

1. Demand and Supply:

   When there is a rise in demand for gold, the price increases, and vice versa. Gold is one commodity that is continuously in demand. Demand and supply play a major role in pricing of gold.

2. Inflation:

   As gold prices react to inflation, Indians prefer to invest in gold. When inflation rises the currency values go down. Thus, people tend to hold money in the form of gold. When inflation lasts high for a long period of time, gold acts as a hedging tool against inflationary conditions. As the value of currency keeps fluctuating, gold value is considered stable in the long run.

3. Central Bank of India:

   The central bank’s decision to buy or sell gold can affect the price due to the sheer volume of transactions.

4. Interest rates:

   Both gold and interest rates have an inverse relationship. When the interest rates increase, people sell off their gold and use the money to earn high interest. When the interest rates decrease, people buy more gold resulting in increase in demand.

5. Monsoon:

   Rural demand plays an important role in demand for gold; the maximum purchase of gold in India is done from rural market. Good monsoon results in good harvest and the amount earned is used to invest in gold which is used in rainy season as in poor monsoon gold acts as a safe haven.

6. Import Duty:

   As gold is not produced in India, it is important for consumption from other countries and import duty plays a crucial role in price fluctuations.

7. Indian Jewellery market:

   For every Indian household, gold acts as an integral part. Wedding, festivals are incomplete without gold purchase. Therefore, during this season the demand for it increases and resulting in an increase in price.

8. Government Reserves:

   The government holds reserves of gold. When RBI starts to buy greater quantity than it sells, the price increases as it will result in insufficient supply of gold and vice versa.

9. Currency fluctuations:

   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.

10. Protection from volatility or uncertainty:

    To protect from uncertainties, people wish to invest or buy gold as it is a safe commodity.

11. Correlation with other assets:

    Gold is a highly effective portfolio diversification because of its low negative correlation with all the major asset classes. When shares of companies fall there is an inverse relationship shown between gold and equities.

12. Geopolitical factors:

    During geopolitical turmoil, gold usually does well. During crises various asset classes have a negative impact but there is a positive impact towards gold as it acts as a safe haven for parking of funds.