Factors Impacting Gold Prices – COMPLETE GUIDE

Gold and Silver are the most complicated commodities to determine the price. Others like stocks, currency, etc. are easily determined based on the data. If you have the data, by drawing a technical chart, it is easy for even novice investor can determine the trend of stock prices. These are fully driven by the actual data. However, gold is not directly valued by any specific data, in fact the value of gold is depends on how other commodities are performing in the global market. Gold value purely driven by the indirect influence so many other factors like US dollar, Oil price, Festival season, political situation, etc.

If any investor bets on the future trend of Gold, look into the facts closely, he may have used only set of data used for the calculation. It is not easy to use all the related data to determine the gold price, which means gold is the most unpredictable commodity. This article explains few of the important factors which is impacting the fold prices. Note that there is hundreds of factors can be changing the gold’s price movement, but understanding all the factors are not easy for everyone. Here what I have listed is the most important and commonly known to everyone. Also join our facebook page to participate in the discussions.

The below chart shows the gold price trend for the past 10 years. In the global market, gold price is denoted in the USD for Ounce. I have used the same metrics for this article. Since currency is not relevant to discuss about the price movement.

Gold Price for Past 10 Years

Gold Price for Past 10 Years

1. USD Vs Gold

It is one of the prime factor which is influencing the gold prices. One might think why dollar value has the impact on the gold. If you are a novice investor from India, you probably have the opinion that gold is used for Jewellery purposes and only demand coming from the festival seasons. If you think so, this article is for you to understand the factors influencing the gold demand.  Now US dollar is considered as the global currency for any cross border transactions.

To put in simple terms, if India wants to import from China, India will not give the money in Rupee or Renminbi (Chinese currency) for the payment. It will be on the US dollar. Any transactions to other countries will be in the US dollar. For that reason, every country will have the foreign exchange reserve (Forex) to meet all the daily and future expenses for that country.

In this case it will be mostly in the dollar values. It is important that global currencies like dollar has to be more stable, otherwise it will be difficult for us to maintain that reserve. If dollar value goes down, it means that amount of goods you can import from that reserve will be less. To avoid that risk, everyone will be buy a currency which is more stable in the value and no downside risk. This concept is known as hedging. Gold is purely used as the hedging against US dollar. (Reference : Hedge)

Whenever US economy goes down and dollar value decreases, investors sell the dollar and buy gold as the hedge fund. I hope this explanation is sufficient to understand why Gold and Dollar has the inverse relationship.


Gold Price Movement – 1985 to 2010

The above graph is the gold price chart from the year 1985 to 2010. In general, in the global market gold values are represented per ounce. The above chart shows the natural trend till year 2002. Till that time dollar value is good and people interested in buying more dollars. After the year 2002, dollar value is fall steadily and gold price skyrockets to peek levels.

As I have told, it is one of the factor which may be influencing the price of gold. Also it is one of the important factor for gold price movement.

US Debt Vs Gold:

As with the dollar value, gold has the correlation with the amount of US debt. When US debt increases, gold value increases. Read the below chart which clearly explains how closely gold is moving up with US debt.

US Debt and Gold Price Movement

US Debt and Gold Price Movement

Source : Sun Shine Profits

2. Demand For Jewellery

It is another factor which has the slight impact on the gold prices. But, jewellery demand will not have any long term impact or a drastic movement in the value. This would have only a minimal impact that too only on the festival seasons. India and China are the two biggest import of gold. This year alone, India’s gold import could touch 1000 tones which is predicted by World Gold Council on April , 2013. The below two charts would provide great detail on how China and India dominating the Gold imports for the coins and jewellery purposes. Note that, this data is only on import, not about the purchase of reserves.

China and India Gold - Consumer Demandjewellary-gold-china-india3. Central Banks Reserves

As I have explained in the previous section, gold is mostly used by all the reserve banks as the hedge fund. In fact, most of the gold consumptions are done by the reserve banks across the world. In 2009, India has purchased 200 million tonnes of gold from IMF and increased its reserve. It is one of the good move by the RBI governor Subbarao. ( India to lease out this gold for stopping the rupee fall). The below table shows the current gold reserve with the leading countries. India is the 11th highest holder of the gold reserve. USA has the highest and maximum reserve as the gold.

Top 10 Gold Reserves In The World

Top 10 Gold Reserves In The World

This below table shows the current situation of percentage of gold in various categories. Jewellery tops the list.

Gold Category and Proportion4. Production of Gold

This part of the factor is not discussed mostly by the common investors. In fact, this is one of the main reason why gold prices are not coming down to the previous low levels we have seen in the last decade. The cost of gold mine is very expensive and the issues pertaining to gold mines are very high which requires huge investment to continue. Also political situations too impact the gold production. As we are aware of the higher inflation and high crude oil prices, which ultimately impact the gold price production cost (Infographics on gold mine cost).

This factor is also related to another factor supply and demand. I need not explain that in the separate section. If the production goes down, supply will be squeezed and price of the gold will be increased. 

The below chart shows the top 10 gold mining country in the world as of the year 2009.

Top 10 Gold Production in the World

Top 10 Gold Production in the World

5. Interest Rate

However, this factor is some what linked to one of the above factors. If you look into all the factors in gold, you can not specify anything which is directly impacting the gold prices. All the factors are indirectly linking to one another and then changes the course of gold. If interest rate increases, people will deposit their money to the banks which would offer good interest income. If you keep the investment on gold, which is not earning any interest on it, so most of the investors sell their gold and deposit for higher interest rate. Which may put more pressure to the gold prices.

But, this is not a thumb rule for all the scenarios. In some case, this may work opposite depends on the other factors.

6. Local Factors

All the above factors are in the global market. Gold price movements are largely influenced by the global economy and related factors. However, local factors would impact the price of the gold bars sold in the local currency. In this section I will explain some of the recent announcements from the Indian government which have the direct impact of the gold prices.

Indian has increased the import duties on gold to curb the rupee value depreciation and help the current fiscal deficit. What happens when one country increases the import duty?. The actual cost of that commodity in the local market will be increased. Please read India’s efforts to curb gold imports to understand the total measures taken by govt. and RBI this year 2013 till date.

Gold and Silver

One more interesting fact is the gold and silver move in the same direction. It is same in most of the times. Look at below chart and understand the correlation between gold and silver. The scale movement would be different, but the direction is very much similar in most of the times.

Gold and Silver Price Movement

Gold and Silver Price Movement

Final Words…

Wow!!. I have done my own research and presented the facts about gold price movements. Now it is your turn for writing the feedback about my analysis. Please share your opinion like whether this article is useful to you or how I can improve it better?. Did I miss any important points in this article?. Please write down your questions and thoughts immediately once you completed reading this article. Also join our facebook page to participate in the discussions.

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