Context:
Recently, Global price of gold (24 carat) was $2,349.88 per ounce. In India it was ₹7,174 per gram.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Gold Price Dynamics and Correlations
- Factors Determining Global Gold Prices
- Determinants of Gold Price in India
Gold Price Dynamics and Correlations
Current Gold Prices:
- Global price of gold (24 carat) as of April 10: $2,349.88 per ounce.
- Gold price in India: ₹7,174 per gram.
Recent Trends:
- Gold prices have surged significantly in recent weeks and are anticipated to continue rising.
Correlation Factors:
- Crude Oil Prices: A direct relationship exists between global crude oil prices and the international gold price (positive correlation).
- When global oil prices increase, gold prices also rise.
- U.S. Dollar Value: An inverse relationship is observed between the external value of the U.S. dollar and the international gold price (negative correlation).
- A decline in the U.S. dollar’s value against major trading partners’ currencies leads to an appreciation in gold prices.
Reasons for Correlations:
- Inflation Hedge:
- Rising international crude oil prices indicate potential global inflation.
- This sparks an increased demand for gold as a safeguard against inflation.
- Asset Stability:
- Gold is considered a tangible asset, unlike financial assets, and is thus not prone to value depreciation.
- Currency Exchange Rates:
- Since the global price of gold is denominated in U.S. dollars, a depreciation of the dollar results in an increase in the global price of gold.
Factors Determining Global Gold Prices
Supply Side Factors:
- Production and Mining Costs:
- Gold production by producing countries and the associated mining costs impact the supply side.
- With most accessible gold already mined, new production requires deeper and more expensive mining efforts, as gold mining is both energy and labor-intensive.
- Energy Costs:
- Rising prices of crude oil and natural gas contribute to increased gold prices due to the energy-intensive nature of gold mining.
Demand Side Factors:
- Institutional Demand:
- Central banks’ demand for gold significantly influences its price.
- Central banks acquire gold to bolster their reserve assets, as gold is a stable store of value and underpins the issuance of new currency.
- Amid the threat of inflation due to the surge in crude oil prices (with Brent crude nearing $90 a barrel) and geopolitical uncertainty from conflicts in West Asia and Eastern Europe, central banks worldwide, particularly the Central Bank of China, are increasing their gold reserves.
- Current foreign currency reserves in central banks are susceptible to risks and value depreciation.
- Investor Demand:
- Both individual and institutional investors seek to invest in physical gold or its financial derivatives and Exchange Traded Funds (ETFs) as part of their investment portfolios.
- While return on investment is a primary concern, the diversification of risks and investment safety, especially under uncertain geopolitical and economic conditions, drives demand from this group.
- Consumer Demand:
- Consumer demand comes from both individuals and jewelers.
- In China and India, the largest consumers and importers of gold, it is purchased as a traditional store of wealth and for ornamental purposes on special occasions. Thus, consumer demand is primarily seasonal.
- Industrial Demand:
- Gold’s intrinsic properties like malleability and conductivity make it a preferred metal in various industries, influencing industrial demand.
Determinants of Gold Price in India
Demand and Supply:
- Gold prices in the domestic market are largely influenced by the demand and supply dynamics.
- Prices tend to rise when the demand for gold surpasses its supply.
- Conversely, prices decrease when the market demand is lower than the available supply of gold.
Interest Rate:
- The Reserve Bank of India (RBI) monitors and adjusts the gold loan interest rates in India to manage capital flow.
- Higher interest rates often lead to a significant sell-off of gold, resulting in increased supply and consequently higher gold prices.
- Conversely, lower interest rates stimulate demand, leading to reduced gold prices.
Economic Situation:
- Gold is often considered a hedge against inflation and recession, prompting people to invest in it during adverse economic conditions.
- Economic downturns lead to a decline in the financial market, causing investors to seek safer investments like gold, thereby increasing its demand and price in the domestic market.
Rupee-Dollar Conversion Rate:
- An increase in the value of the dollar against the Indian rupee makes it costlier for India to import gold from international markets.
- As a result, the price of gold in the Indian market also rises significantly.
Mathematical Formulas to Calculate Gold Prices:
- Purity Method (Percentage):
- Gold value = (Gold rate x Purity x Weight) / 24
- Karats Method:
- Gold value = (Gold rate x Purity x Weight) / 100
-Source: Indian Express
