As investors, we need money and Gold which
is an important prospect for us. But it can be a frustrating investment to own
as it is a tough asset to value, and a lack of knowledge of where the gold
price is headed can lead to a huge loss of money. So it is important for us to
understand the market of gold. As me move forward we shall analyze the factors
affecting gold prices, what motivates people to buy gold, its recent trends and
future prospects.
Factors
Affecting Gold Prices
It is important for us to understand
what factors affect the prices of gold before we move forward in making an
investment into it.
1) Inflation: inflation is one of the most important factors affecting the
price of gold. Inflation tells us where the prices of goods are heading and
gold directly correlates it i.e. the price of gold increases with inflation and
decreases with deflation.
2) Interest rates: Interest rates are another important factor affecting
gold prices. During high interest rates capital available with people is
scarce. Therefore demand of gold decreases, hence the prices of gold comes
down.
3) US Dollar: Gold prices very much depend on the US economy factors like
balance of payments, balance of trade, US debt, its GDP and how dollar is
affected by them.
a.
Balance of payments, balance of trade:
These factors tell us on how much deficit a country is facing. If US are facing
sustainable periods of deficit it leads to devaluation of its currency, thus
leading to decrease in the value of dollar and thus affects gold prices.
b.
US debt: If US owes a huge amount of
debt to other countries say in the form of treasury bills, and the debt becomes
unmanageable, then countries dollar will lose its credit. It will lead to rise
in inflation and consequently increase in the prices of gold.
Motivators
in buying gold
The main reason for buying gold is that
people see it as a hedge against inflation. It is considered a safe asset as
gold is the only investment that pays you well when economies face turmoil and when
the stock markets aren’t performing well. Investors mostly consider the local
factors as a source of influence while investing. The same is their attitude
towards investing in gold. The only difference is that gold is actually an
International commodity, priced in dollars which is heavily influenced by the
international market scene.
Explanation
of the recent trends in Gold Prices
Recently the prices of gold in April-June 2013 have seen a fall in the
international markets which led to increase in demand from Indian and China,
the largest consumers of gold (jewellery). Globally, jewellery demand was up
37% in Q2 2013 to 576 tons (t) from 421t in the same quarter last year,
reaching its highest level since Q3 2008. Though demand for jewellery was up,
but overall demand for gold was down 12% on a year ago. The decline in demand
was owing to global world economy not doing well and people not having liquid
money to invest in gold.
Recent trend of Gold prices in India:
The above chart shows the movement of gold prices in terms of dollars. It
clearly shows that gold has peaked out somewhere in Aug 2011 when it touched
$1926 per ounce, since then we did not see the same price again.
India is very closely connected to the world economy. Hence, there is no
escape from its impacts. Gold is purely an international commodity, priced in
dollars unlike equity markets which are directly affected by both international
and domestic factors. Gold has more linkage to the international factors. The
gold rates in India are no longer determined by demand as the international
market acts as a bigger driving force when it comes to determining the gold
prices.
On the other hand, the chart above indicates that gold prices in India
peaked out somewhere in November 2012 at Rs 34000/- per 10 gram. So at a time
when internationally gold was falling, dollar prices led to the rise of gold
prices in India.
The chart above illustrates that in Aug 2011, a time when internationally
gold was at its peak, INR stood at 45.74 against the Dollar. After that gold
prices started sliding but INR vs Dollar starts rising. We can see from the
graph that in India the gold prices had increased though internationally the
prices of gold decrease. Thus we can say that the depreciation of rupee has a
greater impact on the rise of gold prices than decrease in gold prices
internationally.
Future Prospects
The recent news of Fed maintaining its $85 billion monthly asset buying
program implies that the Fed is pumping more dollars into the world market.
This will lead to depreciation of the value of dollar. People will look for an
asset which can be a substitute for dollar. Since gold is a rare commodity, it has
less counter party risk and people have valued it a lot in the past, thus the
demand for gold is going to increase. Fed has not defined any period for pulling
back its stimulus which means gold will follow a rise in prices till a stimulus
is available and money is available for people to buy.
As for the Indian scenario, we can say that it largely depends on the
value of Indian rupee against the dollar. Indian rupee strengthened against
dollar when Fed announced to continue with the stimulus package. But with low
GDP growth this quarter and elections coming up, we can expect the rupee
depreciating further which will lead to rise in prices for gold.
“This
article is written by Sumit Agarwal, a PGDM student of 2012
batch and Anwesha Das Gupta, a PGDM student of 2013 batch of IIM Raipur. They can be reached at pgp12099.sumit@iimraipur.ac.in and pgp13067.anwesha@iimraipur.ac.in".
Your suggestions and comments are always welcome.
