Traditionally speaking, one of the most popular methods of investment has been gold. Buying gold was one of the preferred investment methods before we learned about fixed deposits or capital markets, or mutual funds.
Gold has always had great significance in India, as it has been used as a symbol of luxury during weddings and festivals. Investing in gold has developed over the years as an ideal hedge for uncertain markets, primarily due to metal scarcity.
While companies are shut down and the economy is slowing down, most gold buyers are perplexed by one question. Why are gold prices increasing? What are the critical factors that impact gold prices? Let's find out.
Factors Influencing Prices of Gold:
Although a lot has been said about factors that influence financial markets, many investors are unaware of what triggers rising or dropping gold prices. Here are some standard variables that cause a price change:
1. The Demand and the Supply
The demand and supply of gold play an essential role in deciding its price, as is true for any traded commodity. Gold is not a consumable commodity, unlike oil. There is still all the gold that has ever been mined left in the world. Also, the quantity of gold extracted is not very high per year. And thus, as demand for gold rises, as supply is relatively scarce, the price increases. Such an argument also explains how gold prices might differ from one place to another. If you belong to the city of Kolkata, you might notice that muthoot gold price in Kolkata varies across different localities.
2. The Inflation
As inflation rates increase, the currency's value decreases. Many other opportunities for investment often struggle to produce inflation-beating returns. Therefore, most individuals are beginning to invest in gold. Gold serves as an excellent hedge even if high inflation rates last for an extended time, as fluctuations do not influence the currency's value.
3. Interest rates
The price of gold has an inverse relationship to interest rates. People don't get good returns on their savings as interest rates decline. They then prefer to split their deposits and instead buy gold, causing demand to increase and so the price. On the other hand, people sell their gold and invest in deposits as interest rates rise to gain high interest, resulting in a decline in demand and price.
4. Demand for Indian Jewellery
Gold jewellery is central to most religious festivals and marriages in India. Therefore, the demand for gold rises during festivals and wedding seasons, boosting its price. However, the gold rate in Kolkata and other cities might also significantly influence your buying decision if you belong to the city.
5. Government Reserves
The Government of India owns gold reserves. It can purchase or sell gold through India's Reserve Bank, depending on its policies (RBI). Depending on whether the central bank buys or sells more, the price of gold may be influenced.
6. Duty for Import
India as a market contributes less than one per cent to the production of gold globally while it is the second-largest consumer of this precious metal. To satisfy the high demand, gold buyers in the country import a lot of gold. Import duty thus plays a vital role in the price of gold.
7. Fluctuating Currency
Gold is traded in USD in the international markets. USD is translated to INR during importation. Thus, the import price of gold and the sale price may be influenced by any USD or INR fluctuations.
Why are gold prices so dynamic?
1. Reduced Mining of Gold
The demand and supply equation is the primary factor that influences gold prices. Though demand increased, owing to lockdowns in different countries, gold mining activities were severely affected, affecting supply, contributing to a further increase in prices.
2. Overseas Gold Price Increase
The international price influences the price of gold in India. The situation abroad has contributed to a steady increase in gold prices worldwide over the past few weeks.
3. The Exchange Rate
The Indian Rupee has dropped sharply. As India is the second-largest gold importer, gold prices are heavily influenced by such exchange rate fluctuations.
With gold prices catching most investors' attention before deciding to jump on the bandwagon, it is essential to consider all aspects before investing.