Factors That Affect the Price of Gold


The annual demand of gold in India is equivalent to 25% of the total global demand for the metal. Being one of the largest consumers of gold, there is definitely a surge in demand for gold jewelry. This is one of the factors that determine the price of gold in India. Apart from this, there are other factors mentioned below.

Consumption Demand – As mentioned, India is one of the largest consumers of the yellow metal, and this means that the demand for it is high. Higher the demand for the metal, the higher will be the price for the same. Here, in the nation, the metal is used for both adornment and investment purposes. Therefore, the consumption demand is high.

Inflation – Inflation and gold price are directly proportional. When inflation rises, it devalues the currency of a particular nation. This, in turn, causes investors to shift to save haven assets causing its value to rise.

Interest Rates – Some experts believe that there is an inverse relationship between gold and interest rates. Higher yields is an indicator of a booming economy, and this results in inflation. Therefore, investors use gold as a hedge to protect themselves against inflation, thereby causing the price of gold to rise. On the flipside, in a booming economy when interests are high, investors gather around investments with fixed returns. This depletes the demand for gold and thereby causes the price of gold to deplete as well.

Monsoons – Interestingly, good monsoons increase the demand for gold. Rural India consumes around 850 tons of gold a year, roughly 60% of the total country’s consumption. Therefore, the monsoons play a major part in the consumption demand. A good monsoon means better crops, which in turn translates to more spending capacity for the farmers. This earning is used by the farmers to buy gold in order to create assets. However, if the monsoon wasn’t that great, farmers tend to sell off their assets to create funds.

The Strength of Dollar – The value of the dollar in correspondence to other currencies also plays an important role in the valuation of gold. The higher the value of the dollar in correspondence to other currencies, the more likely that the value of gold depletes.

Equity Performance – There are correlations between the equity market and gold prices. If the equity market is performing badly, investors tend to flock towards the yellow metal, thereby increase the demand and value of gold.

Geo-political Issues – Generally, the greater the political turmoil in the world, the higher the demand for the metal. A political turmoil indicates that the economy may be performing badly. In a spiraling economy, safe haven assets are preferred by investors. This, once again, increases the demand for gold, thereby increasing the value of it. The recent political events such as the Brexit and the trade war between China and USA are examples of global turmoil that helped gold gain value.

Future Demand – According to several sources, the demand for the yellow metal is 1000 tons higher than the supply. Most of the gold is being recycled, meaning that the supply is limited while the demand is constantly increasing. This maintains the price of gold to be at a high.

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