With an annual demand equivalent to about 25 percent of the total physical demand worldwide, India is one of the largest consumers of gold. Traditionally, there is a surge in jewellery demand during the festive and wedding seasons, leading to a rally in gold prices. While the demand for gold has a role to play in its price, there are several other factors that have a bearing on it as well.
According to a report by the World Gold Council, annual data from 1990 to 2015, revealed two significant factors affecting gold consumer demand (jewellery, and bar and coin combined) over the long-term. "All else being equal, gold demand is driven firstly by, income i.e. gold demand is seen to rise with income levels. For a 1 percent increase in income per capita gold demand rises by 1 percent and secondly, gold price level i.e. higher prices deter gold purchases. For a 1 percent increase in prices, gold demand falls by 0.5 percent."
Demand for gold in India is interwoven with culture, tradition, the desire for beauty and the desire for financial protection. According to a study by World Gold Council commissioned by the World Gold Council and Federation of Indian Chambers of Commerce and Industry (FICCI), Indian consumers view gold as both an investment and an adornment. When asked why they bought gold, almost 77 per cent of respondents cited safety of investment as a factor, while just over half cited adornment as a rationale behind their purchase of gold.
People want to invest or buy gold to protect themselves from volatility and uncertainty. The preference for physical assets makes Indian households view gold as a safe haven, an asset to buy when other assets are losing value. Underlining gold's attraction as an asset for good times and bad, most investors would buy gold whether the domestic economy was growing or in recession.
According to some industry experts, under normal circumstances, there is a negative relationship between gold and interest rates. Rising yield indicates an expectation of strong economy. Strong economy gives rise to inflation and gold is used as a hedge against inflation. Also, when rates rise, investors flock to fixed-income investments that yield a fixed return unlike gold which does not carry any such return. So, demand takes a back seat with prices remaining flat.
Rural demand plays an important role in the demand for gold in the country which depends primarily on monsoons. India annually consumes 800-850 tonnes of gold and rural India accounts for 60 percent of the country's gold consumption. Therefore, monsoon plays a big part in gold consumption because if the crop is good, then farmers buy gold from their earnings to create assets. On the contrary, if there is deficient monsoon, farmers tend to sell gold to generate funds.
The rupee-dollar equation has a role to play in Indian gold rates although it does not impact global gold prices. Gold is largely imported and hence if the rupee weakens against the dollar, gold prices will likely appreciate in rupee terms. So, a deprecating rupee may dent the demand of gold in the country. However, remember the change in rupee-dollar rates has no impact on gold rates denominated in dollars.
It is believed by some economists that gold is a highly effective portfolio diversifier due to its low to negative correlation with all major asset classes. Still, as a rule, gold shows no statistically significant correlation with mainstream asset classes. However, some suggests that there is evidence that when equities are under stress, in other words when shares are falling rapidly in value, an inverse correlation can develop between gold and equities. Gold protects one's portfolio from volatility because the factors, both at the macro-economic and micro-economic fronts that affect the returns from most asset classes do not significantly influence the price of gold.
Gold usually does well during geopolitical turmoil and the current crisis over Korea's nuclear capability has boosted the prospects of the yellow metal. Crises such as wars, which have a negative impact on prices of most asset classes, have a positive impact on gold prices since the demand for gold goes up as a safe haven for parking funds.
Under normal circumstances, gold and dollar share an inverse relationship. Since international gold is dollar denominated, any weakness in the dollar pushes up gold prices and vice versa. The inverse relationship is because firstly, a falling dollar increases the value of currencies of other countries. This increases the demand for commodities including gold. It also increases the prices. And secondly, when the US dollar starts to lose its value investors look for alternative investment sources to store value and gold is an alternative for those investors.
According to some estimates, global demand for gold is 1,000 tonnes more than the supply. With no new mining capacity coming through, most of the gold is being recycled. Therefore, less of supply is another factor for changes in gold rates. Inflationary pressures in the world economy are positive drivers of gold prices.
|Low or Negative Interest Rates||When real interest rates are low (or negative), investors turn away from paper assets with declining value and turn toward assets with real value, like gold.||More Demand for Gold||Higher Gold Prices|
|Central Bank Policy||For the past several years, central banks around the world have switched from being net sellers to net buyers of gold.||Gold Viewed as Currency||Higher Gold Prices|
|The End of Easy Monetary Policy||A long period of historically low interest rates worldwide encouraged massive borrowing at every level, and the world now faces record amounts of debt.||Another Global Financial Crisis||Higher Gold Prices|
|Lack of New Discoveries in Gold Mines||Gold miners have experienced increased production costs, resulting in a higher replacement cost per ounce of gold.||Stagnant Production and Reduced Supply||Higher Gold Prices|
|China and India “Chindia” Have Strong Cultural Affinity for Gold||Growing middle classes in the world’s most populous countries fuel gold buying for weddings and seasonal gifts.||Increased Spending Power Correlated with Gold Buying||Higher Gold Prices|
Today, gold is sought after not only for investment purposes and a strong jewelry market, but it is also used in the manufacturing of certain electronic and medical devices. Gold (as of July, 2019) was around $1,420 per ounce and making record highs. What factors drive the price of this precious metal?
Central banks hold paper currencies and gold in reserve. The World Gold Council has stated that central banks have recently begun buying more gold than they are selling, the first time this has happened in decades. As the central banks diversify their monetary reserves - away from the paper currencies they've accumulated and into gold - the price of gold rises. Many of the world's nations have reserves that are composed primarily of gold, including the United States, Germany, Italy, France, Portugal, Greece and the Euro area. (Learn more in What was the Gold Reserve Act?)
The price of gold is generally inversely related to the value of the United States dollar: a stronger U.S. dollar tends to keep the price of gold lower and more controlled; a weaker U.S. dollar is likely to drive the price of gold higher. This is because people have a tendency to invest and trade in dollars when the dollar is strong. During times of economic uncertainty and when the dollar is weak, however, people prefer to invest in gold, through vehicles such as gold funds or coins.
In 2010, jewelry accounted for approximately 54% percent of gold demand, which totaled 3,812 tonnes, according to the World Gold Council and The London Bullion Market Association. India, China and the United States are the largest consumers of gold for jewelry in terms of volume. Consumer demand in China, for example, for the first two months of 2011 reached 200 tonnes - a huge increase over the previous year, which took 10 months to reach 209 tonnes. Another 12% of demand is attributed to medical and industrial uses for gold, where it is used in the manufacturing of medical devices like stents and precision electronics like GPS units. Gold prices can be affected by the basic theory of supply and demand: as demand for consumer goods such as jewelry and electronics increase, the cost of gold can rise.
During times of economic uncertainty, as seen during the recession of the late 2000s, more people turn to investing in gold because of its enduring value. Gold is often considered a "safe haven" for investors during uncertain times. When the expected or actual returns on bonds, equities and real estate fall, the interest in gold investing increases, driving up its price. Gold can be used as a hedge against currency devaluation, inflation or deflation. In addition, gold is viewed as providing protection from political instability, as evidenced by the recent unrest in the Middle East and North Africa (MENA), which may be partly responsible for gold's recent rally to new highs. (Learn more in Tips For Recession-Proofing Your Portfolio.)
Major players in worldwide gold mining include China, South Africa, the United States, Australia, the Russian Federation and Peru. The world's gold production affects the price of gold, another example of supply and demand. Gold mine production increased by about three percent in 2010 to about 2,652 tonnes, according to GFMS as several new large-scale mines began operations. Despite this small increase, however, gold mine production has been in a decline since the early 2000s. One factor is that all the "easy gold" has already been mined; miners now have to dig deeper to access quality gold reserves. The fact that gold is more challenging to access raises additional problems: the miners are exposed to additional hazards, and the environmental impact is heightened. In short, it costs more to get less gold. These add to the costs of gold mine production, resulting in rising gold prices.
We have long been, and will likely continue to be, enamored by gold. The recent recession has stirred a modern day gold rush. Discovery Channel's Gold Rush: Alaska, a reality show about a team of inexperienced miners hoping to strike it rich in Alaska's backcountry, brought in more than 4 million Friday-night viewers. The Gold Prospectors Association of America, a group that caters to recreational miners, saw membership nearly double in 2008 as the gold bug spreads. The demand for gold, the amount of gold in the central banks' reserves, the value of the U.S. dollar and the desire to hold gold as a hedge against inflation and currency devaluation, all help drive the price of gold, one of the world's precious metals.