- 31 Jan , 2022
- Blog
3 Points To Know While Determining The Future Price Of Gold
Gold has been a symbol of wealth for years in India. Most people consider it when they want to add a sense of status in a place of honor at a wedding or religious ceremony.
Gold is also associated with spiritual beliefs so many people treat it as an investment opportunity that works even if the economy is experiencing a downturn!
It’s not surprising that there are so many queries being asked about this precious metal such as: ‘Is gold always considered as wealth?’ and ‘What makes the price fluctuate?’
So, let's get some answers below!
Factors affecting gold price:
- Hedging
- Regulations
- Seasonality
#1 Hedging
Hedging means offsetting the risk of any adverse price movements. Gold is used to hedge many things such as:
a) Inflation
As inflation rises, people may choose to invest in gold as a hedge against inflation. Gold prices tend to be stable and hold their value if held for a long enough period of time. According to an article by WGC (World Gold Council) for every 1% increase in Inflation, gold demand In India increases by 2.6%, highlights World Gold Council Report
b) Uncertainty
In times of crisis, everyone wants a safe haven for their money. Gold is a type of currency that practically never expires - because it's always going to be something people can use.
As a result, gold has a positive impact during a crisis as investors buy up the precious metal to use as a temporary holding place for making everyday purchases around the world.
c) Financial Assets
Among the most effective portfolio-diversification strategies for investors concerned about protecting their wealth and growing it over time is the use of gold as a way to diversify their portfolios.
Even when major stocks and bonds are taking a dive, gold tends to be rising in value instead of falling - by itself, gold drops only very rarely and only minimally compared with other commodities such as oil.
This makes it an ideal investment for those who want to maintain their wealth while controlling the risk of loss at the same time!
#2 Regulations
The changes in the regulations by authoritarian
a) Interest Rates
Interest rates and gold prices both have a relationship that is inverse to one another. As interest rates increase, the price of gold tends to decrease and vice versa.
For example, when interest rates increased in 2008, people began to sell their gold because they could make a greater return by investing in something else. In 2010 the opposite happened as the rate of interest decreased causing people to buy more gold as it became more affordable than other investments such as stocks or bonds.
b) Reserve Bank of India
RBI is the central bank of India. The decision to buy or sell gold from the central bank is made when inflation is too high, when the economy is slowing down, or when there is a threat of recession. When the central bank buys gold, this drives up the price of gold.
When the central bank sells gold, it drives the price of gold down. It is important to be aware of the decisions made by a governing body when investing.
c) Government Fiscal Policies
One of the most important things to consider when investing in gold is the impact of government fiscal policies on the price. The government of India has had a long history of using the import duty of gold to manage the price of precious metals.
The government has done this by reducing the import duty on gold in the past when it has looked like the price of the metal was on the decline. The government has also gone the other way and increased the import duty on gold when it looks like the price is moving higher.
The price of gold is also impacted by the volume of gold being imported into the country. If there is a lot of gold being imported on a regular basis, the price of gold is likely to increase. When the volume of gold being imported declines, the price is likely to decline.
#3 Seasonality
Yes, you heard it right! Seasons do affect the prices of gold.
a) Monsoon
With the onset of the monsoon in India, the demand for gold among rural Indians increased. Monsoon is the lifeline of India. It is the biggest factor in deciding the agricultural output of the country. So, naturally, gold demand gets affected by the monsoon.
As agricultural output increases, farmers are able to sell their produce at higher prices. This leads to higher disposable income which they use to buy gold results in a price rise.
b) Wedding & Festive Season
India is one of the fastest-growing economies in the world. Along with this, India’s wedding industry has taken off as the number of weddings that take place in India each year has increased by over 2000% since 2001.
With so many Indians getting married, this creates an enormous demand for gold every year during the time leading up to the wedding season which helps increase its value at this time of year making it more expensive than normal.
Secondly, the price of gold witnessed a sharp rise when India celebrates festivals like Diwali because we have a tradition of buying gold specifically on the day of Dhanteras which inflates the Demand.
Conclusion:
As can be seen, demand and supply play a major role in the pricing of gold. The supply of the commodity is limited due to the fact that it is not possible to create gold out of thin air. This makes it a precious metal, which is why it is priced high.
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