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Gold Price Dynamics and Correlations


Recently, Global price of gold (24 carat) was $2,349.88 per ounce. In India it was ₹7,174 per gram.


GS III: Indian Economy

Dimensions of the Article:

  1. Gold Price Dynamics and Correlations
  2. Factors Determining Global Gold Prices
  3. 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

May 2024