What are the key price drivers for Gold?

Investing in gold has always been a magnetic call for investors. A long term investment can lower the risk and the returns are almost guaranteed. Gold prices are hitting record highs these days causing even more people to invest in the yellow metal. Those who are already invested in gold are jovial and the ones who have not are weighing their options.  

Ways of investing:

1. Spot market investment

In a spot market, transactions are settled on an immediate basis and gold is traded in quantities larger than that by individual investors. Any expert will suggest buying the metal from big spot markets like banks or bullion associations as they are certified and trustworthy institutions. These markets do not move gold to your possession physically to save money or lower the risk. All procedures are to be completed by paper work. You will then officially own the gold and can trade it.

2. Futures trading

This is a unique way of investing in gold. You have to decide a particular date in the future on which the order for buying/selling the gold will be executed at a predetermined price.  You then need to sign a contract with the trading company about your norms. The futures contract states the amount of gold that will be traded, e.g., price per 1 gram or price per 10 gram etc. The quantity of gold traded varies as per the contract.

3. Physical gold

This is the most common and easy method of gold investment. You can buy gold coins, bars and even gold jewelry from a jeweler or bank.  You can keep it in your bank locker or in a safe place in your home and wait for the prices to appreciate. Indians traditionally hold a lot of gold jewelry as they have sentimental value attached to it and require it at the time of marriages etc.

Gold price drivers:

1. Investors

One of the main reasons for the rise in gold prices is the rising number of investors flocking towards the metal in the wake of the global financial crisis. The rising price and safe haven status of gold attracts many investors as all other investments seem uncertain. The total amount of investments is pushing the gold price and market forward. 

2. Oil prices

Gold and oil prices have always been related. This could probably be the case because rising crude oil prices are inflationary and gold is considered a hedge against inflation. Thus, gold can be used as a hedge against oil price rise. The value of gold only increases when inflation rises.  So part of the rise in gold prices can also be attributed to rising oil prices.    

3. Central banks’ gold buying

Central banks buy gold from bodies such as the International Monetary Fund to build their gold reserves. When they buy or sell gold, it has an impact on the gold price. The Reserve Bank of India had recently bought about 200 tonnes gold from the IMF to boost its reserves.

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