Personal Finance

What affects gold prices?

The global economic scenario is evolving. Gold prices have been highly volatile because of inflation, a rise in interest rates by central banks around the globe, liquidity, and geopolitical conflicts between Russia – Ukraine and Taiwan – China. The Russia – Ukraine conflict caused the price of Gold to rise to $ 2071. However, corrective action by the US Federal Reserve, which included rate hikes and withdrawal of liquidity, has brought the prices down for now. 

The factors that affect gold prices 

The supply of Gold: The price of Gold is affected by two factors in this case; a) mining and scrap supply and b) jewellery investment and demand. 

Although mining is an expensive process, production remains stable. The recycling supply of Gold depends on its price. For instance, an increase in the metal price could force many people to cash in. Therefore, recycling supply is crucial, but ultimately it depends on the need of the people to sell.  

Current global jewellery demands stand at 2230 tonnes, 47% of the overall gold supply. Although the market share is substantial, it has little to no effect on the price of Gold. Demands are driven by occasions such as festivals and marriages. In the long haul, monetary and economic modifications affect gold prices. 

The demand for bars and coins: The overall investment in bars and coins is around 1000 tonnes, 21% of the total supply. Speculative positioning and institutional investment can drive the gold price. The demand for bars and coins is based on the present macroeconomic scenarios. It is affected by factors such as the securities yield, the currency’s strength, and the nominal bond yield spread.       

The impact of Debt market yields: The condition of the banking sector and the credit spreads are significant when considering the movement of gold prices. Banks not only provide capital but also help in the creation of liquidity. When the ratio of a leading banking index was considered, it showed that the performance of the banking sector is inversely proportional to the gold prices. How? Say the banking sector suffers an economic downfall. The downfall will lead to economic weakness, meaning the demand for Gold will increase, and its price will go up! 

Final word

The current economic scenario means governments across the globe are riddled with rising deficits, unsustainable debt, and higher interest rates leading to a rise in gold prices. Hence, you must invest in Gold and diversify your investments.

For any clarifications/feedback on the topic, please contact the writer at sourabh.dubey@clear.in

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