Ever since the Covid-19 pandemic struck, gold prices have seen a steep rise and fall. Gold price crossed the Rs. 50,000 per 10 gram mark in July 2020, and came back to around Rs. 45,000 for 10 gram a year later. As of August 10, 2021, gold price in India was Rs. 47,900 for 10 gram.
Have you ever wondered why gold price increases or decreases every day?
Many factors contribute to the fluctuation in the price of gold. Some of them are –
1. Demand and supply
As per data by World Gold Council, 30% demand for gold is driven by investments. Over the last three decades, the annual volume of gold bought by investors has increased by almost 235%. Historical data by the council has proved that when the level of income rises, so does the demand for gold. For each 1% rise in income per capita, there is a similar 1% rise in the demand for gold. On the other hand, for every 1% increase in the gold price, demand falls by 0.5%.
2. Hedge against inflation/crises
Whenever there is a rise in inflation, investors turn to gold because economies tend to become unstable and the market becomes volatile during such conditions. Gold is considered a safe investment avenue as it is not easily influenced by currency fluctuations.
3. Government’s gold reserves
If the government decides to hold its gold reserves, there would be an increased demand for gold, driving up the price.
4. Government’s import and export policies
If the government allows a higher volume of gold imports, gold gains traction and its price increases. As per a report by Business Standard, a national daily, India is the largest importer of the precious metal. If the import duties are lowered, the demand for gold increases, leading to a price rise. Conversely, if the taxes on gold import go up, the demand takes a hit.
5. Recession or economic slowdown
In an economic slowdown or recession, the household savings tend to get directed towards safe investment options like gold. Gold tends to have an inverse correlation with other market-linked securities; when such securities do not perform well, gold does and its demand rises. It causes a surge in gold prices.
6. International trade
International economic policies also affect gold prices. For example, if the interest rates on US bonds and T-bills drop, gold becomes the preferred investment avenue for many investors in the US and that could lead to higher demand, which could further increase the price of gold.
Gold is a rare metal that has traditional and cultural values attached to it. As per data by World Gold Council, gold is now more favored by investors than at any other time in history. If you are an investor looking to diversify your investment portfolio, you can opt for alternatives to physical gold like gold ETFs, Sovereign Gold Bonds and gold mutual funds. Investing in these options helps in avoiding the drawbacks associated with owning physical gold.
Based on the duration of your investment, these alternatives could offer better returns than physical gold. For instance, Sovereign Gold Bonds can offer you an additional 2.5% interest on your invested amount, which is in addition to the appreciation in gold price over time.