Hike in Gold Price, all you need to know about the responsible factors

Be it family or religious festival, gold is the inseparable commodity to fulfill cultural needs of Indian consumers. As tangible asset, Gold is the most desired material for making ornaments.  Traditionally Indians do not treat gold ornaments as resellable commodity.

However, gold makes a crucial impact on the markets along with other dynamic factors. Moreover, gold also contributes in the supply and demand chain of the economy. 

Five of the most responsible factors in determining price of gold are as below:- 

Economic Uncertainty

When a crisis causes a halt to the economic development then generally it affects the  equity market, global market and financial ecosystem noticeably. Due to ups and downs in the demand and supply chain, the markets become unstable and suffer remarkable uncertainty. Ups and downs in the demand and supply creates  some sort of unrests in the markets.

This uncertainty compels the investors to make changes in their investment policies because they try to achieve their financial goals by means of safer alternatives. Under this scenario, people tend to move towards secured assets with their investment. Now, gold (secured class of asset) is the top alternative for this and hence demand for gold increases and subsequently price of gold also increases. 

As already explained, the ongoing Covid-19 pandemic has caused an economic unrest throughout the world. In only 6 months the price has increased from Rs. 30,000 to Rs. 50,000 per 10 gm of 22 carat gold. 

Government Policies

India is the world leader in consumption of gold ornaments. Government policies directly influence the hike in price of gold. When the RBI (Reserve Bank of India) declares changes in the bank interest rates, Government Treasury, yearly gold acquisition and Sovereign Gold Bonds etc., then the market is influenced by diverse factors which creates ups and downs in the prices. During the time of a crisis, decisions pertaining to financial wellness, taxation on properties and other subtle economic policies are solely made by the Government. Such kind of decisions are generally based on the responsible factors of the economic crisis. However, economic reforms are directly related with the amount of cash flow in the markets and agricultural commodities. 

Inflation

In order to combat with the economic crisis, Government usually declares multi billion dollar packages to bring liquidity in the economy. This creates an environment which encourages the citizens for additional expenses. Accordingly, people try to make their finances secured by investing in gold. Statistical data of last decade indicates that the global economic crisis has increased the price of gold. The gold market also complements the tendency of inflation. The value of currency falls down whenever there is inflation and the best way to preserve money is to buy gold. Therefore, when inflation stays high for long period of time the demand for gold increases which also increases the price. 

Population and Demographics

Indian demographics is known to be a blessing for the country as it can create scopes for development. Out of the total Indian population more than 50% population are under 40 years of age and so, the finance sectors hope a change in the pattern of expenses by the young professionals. It is expected that the young professionals will invest in the asset class of gold instead of purchasing physical gold or purchasing by other means. Traditionally, Indian people used to visit retail stores or jewellers to purchase physical gold. But now there are better alternatives in the form of sovereign gold bonds and e-gold available at digital payment gateways. Millennials (young generation) are the main targets of the digital service providers because the young professionals are more likely to buy and sell golds digitally in one click. The young professionals can resort to the digital platform for purchasing golds instead of buying physical gold in the traditional way. 

Moreover, gold is the part and parcel of Indian culture. During festival seasons, price of gold increases naturally because of the high demand. 

Increasing Income

In the last few decades the Indian economy has increased by many times. Income of the middle-class people has increased which has enabled them with more purchasing capacity. The idea of growing wealth in the agricultural sector has brought only undesired results. India being the world leader in consumption of gold, the additional income achieved by the middle-class has been utilized in buying golds. 

With increased income, people would like to invest more in the asset class of gold. Because India is a family centric society, the additional income causes more expenditure. Recent studies done by the World Gold Council indicates that even a slight increase in income causes hike in gold price.