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From dollar to monsoon: Factors that affect gold prices

business Updated: Jul 22, 2015 10:18 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
Gold

Gold is considered to be a safe haven asset. In times of high inflation and volatile stock markets, gold prices usually tend to go up. Its price had more than doubled from early 2009 to end of 2013 as investors in Europe and the US flocked to add more glitter to their investment portfolio rather than park funds in unstable and risky equity markets. (Illustration: Abhimanyu Sinha)

Gold prices have fallen from dizzying highs on global cues. HT explains the factors that influence its prices and its linkages to the dollar and monsoon in India.

Why do people invest in gold?

Gold is one of the several assets that people invest in. Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income.

How are gold prices determined?

Gold is considered to be a safe haven asset. In times of high inflation and volatile stock markets, gold prices usually tend to go up. Its price had more than doubled from early 2009 to end of 2013 as investors in Europe and the US flocked to add more glitter to their investment portfolio rather than park funds in unstable and risky equity markets.

What triggered the fall in gold prices on Monday?

There were reports of massive selling of gold in China on Monday. According to some reports, more than 30 tonnes of gold were sold in the Shanghai spot market on Monday. The heavy selling triggered global prices to fall sharply.

What is the relationship between dollar value and gold prices?

Under normal circumstances, the value of the US dollar and price of gold are inversely related. A stronger dollar usually makes gold cheaper. This is because international prices of gold, like many other commodities, are denominated in dollars. If the dollar strengthens, it makes such commodities expensive in the other currencies. The resultant fall in demand sets off a fall in prices.

Why is the dollar strengthening against a basket of currencies?

The US Federal Reserve has hinted at the possibility of interest rate hikes this year, the first time in nearly a decade. Analysts expect the first rate hikes to come in by as early as September.

What does an interest rate hike mean for the dollar?

An interest rate hike in the US could trigger a dollar flight from emerging countries such as India. A rate hike in the US will encourage foreign, particularly US-based funds, to move money out of India to safer locations closer home. Global funds park money based on expectations of yields. With short-term rates ruling at near zero for nearly a decade, India and other emerging markets offering higher returns were the preferred hotspots. With US interest rates set to rise, most funds may prefer to move money out of these markets. This expectation is making the dollar gain in value.

What other reasons are affecting gold prices?

In addition to the winding down of the US Fed Reserve’s bond buying programme, slowing down of China, one of the world’s biggest gold consumers, is reducing gold demand and thereby affecting prices.

How do monsoon rains or the lack of affect gold prices in India?

Rural spending on most items — from television sets to gold — goes up or down depending on the monsoon as rains are crucial for the summer-sown kharif crop. Nearly 60% of total gold demand in India comes from rural areas, most of which is bought during weddings.

How big is the Indian jewellery market?

India is the largest market for gold jewellery, accounting for most of the nearly1,000 tonnes of gold imports in 2012. According to World Gold Council (WGC), 75% of women say they are constantly searching for new designs.

What drives this demand?

More than 50% of gold jewellery is bought for weddings. The festival of Dhanteras and Akshaya Tritiya have traditionally created a strong seasonal surge in sales. The motivation for a jewellery purchase can be inextricably linked to value, wealth preservation and growth rather than pure adornment – there is therefore little distinction between investment and jewellery demand purchases relating to Indian weddings typically account for 50% of annual jewellery demand. With 50% of the Indian population under 25 and approximately 150 million weddings anticipated in the next decade, the WGC estimates that wedding-related purchasing will drive approximately 500 tonnes a year. A further 500 tonnes of existing gold will be gifted.