India is the world’s largest gold consumer. While demand for gold has been seeing a downward trend in the global economy for the past 5 years, the Indian love saga with the yellow metal is in full vigour. In 2014, India consumed almost 842 tonnes of gold – more than any other country, and this year too, in the third quarter of 2015, we consumed around 225 tonnes of gold. Gold is still a very important and valuable asset for Indians that conveys prosperity and provides security. The lowering prices in the last five years have only spurred the demand further. So what exactly affects the price of gold?
1. Economic Crises and Currency Fluctuations
In India, Gold is seen as a hedge against economic uncertainty and fluctuations. People fall back on it, since it’s a highly liquid asset, second only to hard cash. In conditions of economic instability, other assets become harder to liquidize and their worth too can fluctuate greatly, making gold the preferred investment avenue. Hence, the precious metal becomes more precious (read: expensive) when the economic situation of a country is poor or unstable. And because gold prices operate on price parity, its value in currency is the same across the world. Therefore, an economic crisis anywhere in the world will affect global prices of the metal.
2. Political Instability
Political instability can create a lack of faith in the government amongst the public, leading to a panic situation where people divert investments towards safe and liquid assetshoard safe assets (like Gold). This creates a bearish market for the commodity (more buying, little to no selling) and a bullish market for all other commodities. This demand drives up prices of gold.
3. US Dollar
The US Dollar is the standard of measurement for the worth of every currency in the world, and is also the most widely used currency in global trade. When the US economy is going strong, the dollar is also strong and the gold rate dips. This factor is extremely important while trading on gold related funds or speculating. Why does this happen? The health of a particular currency is reflected by its country’s gold reserves, these are what help it purchase dollars or trade internationally, in adverse situations. Globally, a strong dollar weakens other currencies and corresponding gold reserves. Secondly, a strong dollar is seen as a robust economy, and this too weakens gold prices.
4. Indian Gold v/s Imported Gold
While India is the world’s largest consumer of gold, it is not the world’s largest producer. In 2011, India imported over 900 tonnes of gold. This gold is purchased in US dollars and is then converted into INR for distribution and consumption within the country. The exchange rate at the time of this conversion largely determines the price of gold.
5. Demand and Supply
Gold is a very finite commodity. In fact all the gold in the world can be said to fill up 3.5 Olympic swimming pools. Out of this volume, only about 2500 metric tonnes is produced every year. Even with newer methods that make extraction and refining faster and more efficient, the supply is finite and demand everlasting. This ensures the price of gold will constantly appreciate.