The London Gold Market Fixing Limited which consists of five major banks in London determines the market price of gold. They meet twice a day via conference call at 10.30 am and 3 pm GMT to fix the prices. During these conference calls, the banks declare how many bars they want to buy or sell at the specific price which is declared by the chairman at the beginning of the call. If there are too many buyers and fewer sellers, the price goes up and vice versa.
This process of fixing gold prices has been universally accepted since it brings order to the market. This price is used by banks to conduct gold trading in the markets while refineries and mines value their inventories.
Factors affecting gold prices:
While the above-mentioned process sounds very simple, it is far from being so. Gold prices are affected by several factors, out of which, the common ones are:
1. Monetary Policy
The monetary policy of the US Federal Reserve (commonly known as the Fed) is probably the biggest influencer of gold prices. From time to time, the Fed makes announcements such as its interest rates or policies regarding the US economy which affects gold prices. You must be thinking why does the USA’s policy influence global gold prices? It is because, as mentioned earlier, the US holds the largest reserve of gold in the world.
Out of all of the Fed’s decisions, interest rates affect the prices of gold the most. To understand this, we need to understand something called ‘opportunity cost’. Opportunity cost is basically the loss of an opportunity for making a choice. For example, when you go to a coffee shop, you have a wide range of coffees to choose from. If you choose latte, you are potentially giving up the opportunity of enjoying a mocha. This is called ‘opportunity cost’.
When interest rates go down, investments like bonds and fixed deposits become less attractive. So, investors choose gold over such options, thus increasing the demand for gold, hence the prices of gold increase. Alternatively, when interest rates go up, investors forgo gold to opt for higher interest rate yielding products.
2. Economic Data
Economic data such as manufacturing data, jobs data, wage data, GDP growth and others have an impact on gold prices. The stronger the data, the lower the prices of gold because when the economy is strong, the Fed can tighten their monetary policy by raising the interest rates, thus making gold a less attractive investment option.
The rising prices of goods and services or inflation can affect gold prices. Higher inflation pushes gold prices up and vice versa. When inflation goes up, goods and services become more expensive. Hence, people tend to hold money in the form of gold. This pushes gold prices up.
4. Supply and Demand
Like with all other items, supplyand demand influence gold prices. Higher demand with lower supply pushes the prices higher and vice versa. For example, as per the World Gold Council, in the first few months of 2016, the demand for gold increased by 15% while supply went up by only 1%. Gold prices went up by almost 20% during this time.
5. Currency Rates
The value of various currencies, especially the US Dollar, strongly influences the prices of gold. A decline in the US Dollar represents a weakening of the US economy, thus making gold more attractive and pushing its prices higher. This is the main reason why gold prices have been so high in 2020 when the US economy was adversely affected by the Covid-19 pandemic.
Historic Gold Prices
The last two decades have been spectacular for gold. While the world went through major economic crises, gold continued its upward price trajectory. In fact, if one had bought 10 gms of gold in 1999 by spending ₹ 4,234.00, she would have been able to sell it for ₹ 48651.00 in 2020 – a whopping 11.5 times increase.
Overall, the price of gold has been on an upward journey in the last decade.Let’s see the last 10 years gold price movement in India:
Gold Price Movement (per 10 gms) in the Last 10 Years (24 carats)
We mentioned earlier that in the long run, gold prices have never declined. In the last 50 years, global gold prices have gone up by almost 51 times. Here is a decade-wise breakup of gold prices in the last 50 years:
Gold Price Movement (per 10 gms) in the Last 50 Years (24 carats)
Hence, from a long-term perspective, gold has proven its mettle in being a reliable investment option.
Gold Prices in 2020
2020 has been a record-breaking year for gold, with its prices reaching ₹ 49191.10 per 10 gms (24 carats) in August 2020. This trend has been observed in the global prices of gold as well with the price reaching USD 1955.85 per troy ounce in August 2020.
Let’s see the movement of gold prices between November 2019 – October 2020 below:
Gold Prices (₹/10 gms)
The economic slowdown caused by the lockdown due to the global Covid-19 pandemic triggered the demand for the precious metal. As a result, we can see that gold prices have increased by almost 30% between November 2019 and October 2010. The trend has been the same worldwide.