Factors Affecting Gold Prices

The commodity market is one type of the financial marketplaces where investors can trade in several raw materials or primary products. Commodities are categorised into two different categories, which are hard commodities and soft commodities.

Hard commodities: The commodities which require to be mined or extracted are termed as hard commodities. These type of commodities include natural resources such as gold, oil, aluminium etc.

Soft commodities: The commodities which are farmed and not mined are termed as soft commodities. Such commodities include agricultural products and livestocks such as corn, wheat, rice, tea and so on.

In the commodity market, one of the most commonly traded commodities is gold. Let us look at why investing in gold and gold-based commodities is such a popular choice amongst the investors.

There are several benefits that are associated with investing in gold, such as -

Hedge against inflation: Gold proves to reflect positive returns even during the unfortunate events of economic downfall and volatility in the market. Because of this trend in gold, it can be used by the investors as one of the best options to hedge against inflation and price fluctuations. It has proven to be a beneficial and profitable long term asset.

ETFs and FoFs: Even though physically purchasing gold comes with a risk of depreciation and theft, investors can avoid such unfortunate events by investing in gold through gold ETFs (Exchange Traded Funds) and FoFs (Fund of Funds).

Developing a diverse portfolio: Gold investments can also be used to diversify the investment portfolio of an investor through an easy and well-known investment offered by gold.

Liquidity: Gold funds come withhigh liquidity, thus making it extremely easy and quick to both invest in gold and to exit the investments.

Having discussed these benefits that come with gold, let us now look at the several factors that influence the price of gold in India.

Before an investor invests in gold, he needs to have an understanding of the different factors which play a role in affecting the price of gold. Without knowing these factors, their investments may not prove to be profitable to the maximum degree.

Demand and supply: Demand and supply is one of the biggest factors, if not the biggest, that determine the price of any commodity. So is the case with gold. It is a hard commodity, means it is mined. The amount of gold that is mined every year, is not sufficient. This means an increase in the demand for gold inevitably results in an increase in the prices of gold.

Inflation: As discussed already, gold is a popular and effective hedge against inflation. In the event of an increase in inflation rates, even though the value of currency decreases, it does not affect gold. Therefore, in case inflation rates rise, investors choose to invest in gold. Due to this, the demand for gold increases which may affect the price of gold.

Interest rates: Interest rates affect gold prices in an interesting way. When interest rates increase, investors tend to sell their gold or gold funds and invest in deposits to enjoy the benefits of high interest rates. This means the demand for gold decreases which in turn means a drop in the price of gold. Contrary to this, when interest rates fall, investors tend to avoid deposits and rather invest in gold. In this scenario the demand for gold increases followed by an increase in the price of gold. Thus, it can be stated that the price of gold changes inversely with relation to interest rates.

Jewellery market: In Indian style ornaments and jewellery, gold is very commonly used and is held in a high esteem. When the interest in gold jewellery increases in the Indian jewellery market, especially in festive and wedding seasons, it results into an increased price of gold.

Government gold reserves: The Government of India holds and operates gold reserves. The government can purchase or sell gold through the Reserve Bank of India. These activities influence the price of gold within the country as when the government purchases gold, the supply of gold in the market decreases and cash is injected into the market. This makes the prices of gold go downwards.

Import: The amount of import is also a deciding factor in gold prices within the country. India is the second largest consumer of precious metals, therefore it needs to import gold in order to meet the demands. When the import duty is improved, the price of gold decreases as the availability of gold increases.

Performance of other markets: The performance of other markets such as the equity market and the currency market also plays an important role. During a negative price movement in those markets, investors may choose to invest in gold. As it increases the demand, the price of gold may increase with it.

From the aforementioned factors, it is evident that the major influence in the price movement of gold is played by the demand and supply. If an investor study the markets carefully, and have a clear and in-depth understanding of these factors, they can reap substantial profits from investing in gold. In order to learn more about investments in different market, keep following Nirmal bang.