Rising Gold Prices: The Key Factors

November 21, 2018
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India, as a country, has always considered gold as a metal that denotes wealth and success. We have always been one of the largest consumers of this precious metal. Typically, wedding season and festive events are when gold prices see a significant surge in their demand. However, there are other factors at play that drive the demand up and therefore increase the overall price of the metal.

The Economic Times reported in June 2018 that gold consumption has partly increased with increase in incomes and this in turn drives an upward trend in prices. Here, we discuss few factors that could impact the price of gold in its upward incline.

Interest Rates

There is a negative correlation between gold and interest rates. As gold is used to offset inflation caused by a strong economy, this means that the price goes up in-line with the demand and if investors begin flocking to gold then the prices will inevitably rise.

Supply

Though gold is a good that is not consumed, it is never used in ‘exchange’. It is always stored as a marker of wealth and is there always a tendency to stash it. This ‘store of value’ that gold offers, makes it a thing that people want to keep buying constantly – this ensuring a steady and increasing need for supply, which is a core reason for the rise in its prices.

Inflation

As the inflation in a country rises, people tend to consider gold as a significant value for money and store it. This makes gold prices higher during inflation periods.

Rupee-Dollar Relationship

Though global gold prices are not affected by rupee’s relationship with the dollar, it is definitely important in Indian gold prices. If the rupee weakens against the dollar, such as is the trend in the recent past, the price of gold automatically increases.

Geo-politics Situations

Gold prices ride when there is geo-political conflict and Korea’s current rocky relationships with other countries has led to an increase in prices of the metal. Though wars have a depreciating effect on other assets, it helps in gold prices.

Future Demand for Gold

Gold demand has been steadily increasing, almost to a point where estimates have said it could be 1000 tonnes more than supply can accommodate, which creates a drastic difference between demand and supply, making recycling of gold necessary and an increase in prices, mandatory.

Debt Concerns

Economic uncertainty in certain countries in Europe, specifically, have given rise to fear over financial discipline making the US not as aspirational as it once was. As a result of this, the demand for gold has increased as a stable wealth investment that is steady at a time of economic uncertainty. This again, creates a supply for the metal which makes its prices increase.

Though there are other volatile factors at play such as speculation, credit crises, other asset depreciation or increase, these are the primary top-level factors that lead to a rise in gold prices. For now, price increase in gold has created a lot of excitement for investors.

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