Factor affecting Gold prices

Gold is held by central banks as a part of their reserves.

If trade wars worsen and if the central bankers want to further diversify away from the US dollar, the demand for gold may go up, thus pushing up prices.

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1. Demand for Jewellery

China and India account for more than half of the global demand for gold, mostly for making jewellery. Rising gold prices and the lockdown ensured that gold demand fell 65 per cent (China) and 41 per cent (India) in the first quarter. Global demand declined 39 per cent. When gold prices rise quickly, jewellery buyers may take time to adjust with the new normal.

2.    Demand for Gold as Investment

Investors consider gold as a safe haven. Exchange traded funds backed by gold added 170 tonnes in April 2020 – a five per cent growth in value terms, according to World Gold Council.

Gold ETF (Exchange Trade Funds) assets have grown over 80 per cent over the past one year.

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Bars and Coins also may be in demand as investment avenues. Due to operations of gold refiners being hit in Switzerland, there has been limited supply of refined bars and coins.

3.    Exchange rate

Since gold is priced in US dollars and we import all our requirement, exchange rates play a key role in pricing. A weak rupee can add to the price of gold.

Despite being a safe haven and having rallied spectacularly in the last year-and-a-half, investors must not rush to increase their gold exposure.

Investors would be better off focusing on their asset allocation than chasing returns.

Don’t allocate more than 10-15 per cent of your portfolio to gold. SGBs and gold ETFs are good vehicles to take exposure.

4.    Producer hedging

Miners tend to sell their gold production in the futures markets to hedge themselves in case of a fall in price. This is termed as producer hedging. If producer hedging rises, prices naturally drop. Gold miners may chose not to hedge all their output and even reverse their hedged positions (de-hedge in industry parlance) by buying back the futures contracts sold in the past, if they expect prices to head higher.

5.    Scrap Sales

Gold is sold or pledged to raise cash. Job losses across the world and recycled gold or scrap sale are expected to go up.

Due to the lockdown, large markets such as India have not seen scrap gold sales so far, as jewellery retailers remain shut and banks are not allowed to buy bullion back. But the situation may change after the lockdown ends. Increased scrap sales may push prices lower.


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