Since gold is a universally popular and acceptable investment avenue, the increase and decrease in its price is driven by multiple factors, some of which are:
1. The dynamics of demand and supply
Demand and supply play a crucial role in determining the prices of gold. Gold is not used just as an investment or for jewellery; it also has industrial uses in manufacturing, aerospace, as a conductor of electricity, and life support devices.
Gold also retains its value and characteristics over time. It is a natural resource available in finite quantities and is dependent on mining, which again adds to its scarcity. Whenever there is economic uncertainty or tensions in geopolitics, the prices of gold generally tend to go up because of its limited reserves.
2. Hedge against inflation
If we look at history, gold has always been used as one of the chief avenues to hedge against inflation. When the prices of goods in an economy start to rise, all conventional investments may not be able to perform well and maintain their intrinsic value.
This leads investors towards gold since its value remains unaffected by currency fluctuations, making it a trustworthy investment.
3. Influence of interest rates
The prices of gold and the rate of interest in an economy generally have an inverse relation. When the rates of interest are low, gold becomes more appealing, since it provides a good alternative to low-yielding investments.
When interest rates rise, the appeal of gold can decline since other investment avenues promise higher returns, making them more profitable. This leads to a decline in the demand and cost of gold.
4. Seasonality and cultural significance and trends
Gold prices generally go up, especially during festive months or the wedding season, as the demand for gold jewellery increases, owing to its cultural significance in the Indian subcontinent. This high demand also leads to an increase in the price of gold.
As gold is considered a symbol of wealth and prosperity, the festive months can send the prices of gold soaring.
5. Government policies and reserves
The government also holds huge reserves of gold and is also involved in the buying and selling of this precious metal. When the government makes huge purchases of gold, it can have a domino effect and lead to an increase in prices throughout the market.
The decisions of RBI on foreign exchange and interest rates indirectly impact gold’s cost in the domestic market.
6. Value of the US Dollar
Since the US dollar is the global currency of trade and most gold is bought and sold in dollars, any change in the value of the dollar also affects the price of gold. When the dollar goes strong, the price of gold declines because it becomes expensive to purchase in the currencies of other countries.
When the dollar is weaker, the price of gold increases as investors look for a hedge against inflation and market unpredictability.
