Gold Price Dynamics and Correlations

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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:

Current Gold Prices:

Recent Trends:

Gold prices have surged significantly in recent weeks and are anticipated to continue rising.

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.

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.

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.

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.

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:

-Source: Indian Express