The price of gold is moved by a combination of supply, demand, and investor behaviour. That seems simple enough, yet the way those factors work together is sometimes counterintuitive. For instance, many investors think of gold as an inflation hedge. That has some common-sense plausibility, as paper money loses value as more is printed, while the supply of gold is relatively constant. As it happens, gold mining doesn’t add much to supply from year to year.
This article is divided into following posts (you can jump on any of the points by clicking on it):
1. Factors that boost the Gold price
2. Factors that plummets Gold price
3. Current gold price and its 2020 story
4. Gold price prediction of future
5. Should you invest in Gold?
1. Factors that boost the Gold price
Gold has been one of the most traditional forms of investment. Before we knew about fixed deposits or stock markets or mutual funds, buying gold was one of the preferred means of investing.
Initially, investors hoped that the economy would recover quickly as the lockdowns were lifted and companies resumed operations. And so, many investors started buying undervalued, high-quality stocks. However, with time, the hopes of a near-term recovery got dampened and investors started looking at a haven for their funds.
Since gold is considered to be a perfect hedge against inflation and economic turmoil, the demand for gold increased.
The RBI allowed borrowers to avail of a moratorium on loan repayments till August 31, 2020. The Government also declared a lot of economic stimulus packages to pump liquidity into the markets. So, we had a situation where investors had money to invest but the stock markets were highly volatile and interest rates were falling. Hence, they started investing in gold that is known to be a safe investment during such times.
Reduced Gold Mining
The primary factor that affects gold rates is the demand and supply equation. While the demand increased, gold mining activities were severely impacted due to lockdowns in various countries. This impacted the supply causing the prices to rise further.
The Indian Rupee has fallen sharply since the lockdown. Currently, it is around 75 against the US dollar. Since India is the second-largest importer of gold, such exchange rate fluctuations impact gold prices.
Rise in International Gold Prices
The price of gold in India is affected by its international price. Over the last few weeks, rising number of coronavirus cases, increasing US-China tensions, and overall economic slowdowns have led to a constant rise in gold prices around the world.
Once investors lose hope of the markets recovering in the short-term, they tend to gravitate towards safe havens like gold. While that explains the rise in gold prices, is it likely to continue?
2. Factors that plummets Gold price
A permanent bull market for gold is impossible. If the price of gold had risen consistently and measurably in value since the days of Tutankhamen, its price would now be infinite. The metal’s price clearly rises and falls daily, so what makes one day’s supply and demand curves intersect at one price, and the next day, at another?
Surge in Supply
The supply of gold is largely static from one period to the next. Gold mines are large and plentiful, but almost the entirety of what they produce is wasted. As technology improves, ore with lower concentrations of gold becomes more economically feasible to mine. Discard all the billions of tons of worthless ground rock and it has been estimated that all the gold ever mined would fit on a football field, piled less than 10 feet high. The gold mined each year adds less than the thickness of a coat of paint to the total.
As a long-standing commodity, gold is not a security for the speculative. No one, or at least no one sane, buys physical gold in the hope that it will sextuple in value over the next year. Instead, buying gold is a defensive measure: a guard against inflation, currency devaluation, the failure of less tangible assets, and other woes.
Unlike many other commodities—light sweet crude oil, ethanol, cotton—precious metals differ in that, for the most part, they are not consumed. Less than 10% of gold is mined for industrial purposes (e.g., rheumatoid arthritis drugs and dental bridges), leaving the rest to be held and later sold at the buyer’s will, whether in bullion, coin, or jewellery form. Fundamentally, the total supply of gold is more or less static.
In 2009, Aaron Regent, then president of Barrick Gold Corporation, the world’s second-largest gold producer, stated that gold production had peaked at the turn of the millennium and would continue to fall. And prices did indeed correspondingly rise till late 2011. In fact, they doubled. Yet, in today’s prices, they’ve since lost 15% since that all-time zenith.
Gold’s most pronounced price fall in the past decade happened between October of 2012 and July of 2013, nine months during which the metal lost approximately a third of its value. The price continued to fall to a low of $1,060 per ounce in January 2016 before rebounding.
As of June 2020, the price was $1,751 per ounce. Classical economic theory would blame a bear market on either an increase in supply, which we’ve already determined is unlikely, or a decrease in demand.
Speculation is one reason for changes in gold prices. Investors speculate as to what governments and central banks are going to do and then act accordingly. Gold prices dropped when the Federal Reserve announced it was wrapping up its controversial stimulus program after the financial crisis.
That announcement, coupled that with the preternaturally low inflation rates of the time, rendered gold’s role as a hedge against rising price levels moot. Throw a red-hot stock market into the mix, and the temptation for increasing returns as contrasted with maintaining one’s store of value becomes too great. Why sit on the sidelines with an inert shiny metal when other investors are getting at least temporarily rich?
It is hard for some younger investors to believe, but in the late 1990s, gold was hovering in the $270 range. That’s per ounce, not per milligram. The people shrewd and patient enough to have held onto their gold stashes throughout terrorism, war, prolonged recession(s), and other assorted global upheaval are justifiably proud. And probably still not selling. Particularly when you consider that worldwide economic and political distress is often the norm, not the exception.
It’s tempting to think that gold represents an objective, unswayable measure of wealth, particularly given the metal’s role as an investment throughout the course of civilization. However, it is not. Gold’s value rises and falls just like any other investment. While gold will almost certainly never gain nor lose relative value as quickly as penny stocks and dot-com initial public offerings, gold’s price movements can still convey information.
3. Current gold price and its 2020 story
Gold and silver edged higher in Indian markets, as of 12th Nov 20, though they remain sharply lower this week. On MCX, gold futures rose 0.35% to ₹50,339 per 10 gram while silver futures gained 0.38% to ₹62,780 per kg. In the previous session, gold futures had declined 0.6% or ₹310 per 10 gram while silver rates had tumbled 1% or ₹600 per kg. The recent drop in prices and the festive season is expected to give a boost to gold demand in India. In India, gold prices have seen a sharp correction this week, falling about ₹2,000 per 10 gram this week.
“Amid pent-up customer demand in the market, the revival of the economy and positive consumer sentiment, Dhanteras will kick off a decent buying season for the jewellers across the country. The gold buying ritual on this auspicious occasion will also be driven by the enhanced investment value of gold in this unprecedented time. The purchase appetite of customers is likely to go up during Dhanteras and Diwali,” said Ahammed MP, Chairman, Malabar Gold & Diamonds.
In global markets, gold prices edged higher on 12th of Nov as the global stock market rally on covid vaccine optimism showed signs of stalling. Gold was at $1,871.03 an ounce, up 0.3%. A surge in covid cases around the world and a weaker US dollar supported gold at lower levels.
The US dollar index was down 0.06%, making gold cheaper for holders of other currencies. Among other precious metals, silver fell 0.4% to $24.16 per ounce while platinum was flat at $865.
Gold traders will be keenly watching comments from European Central Bank President Christine Lagarde and Federal Reserve Chairman Jerome Powell who are scheduled to speak at an online ECB Forum.
Mixed ETF activity also shows lack of confidence in investors, say analysts. Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund or gold ETF, fell 0.72% to 1,240.74 tonnes on Wednesday.
“Gold may struggle for direction as market players counter-current worsening virus situation against the increased possibility of a vaccine in coming months and also as market players assess the feasibility of a large stimulus from the US. The general bias, however, maybe on the upside amid persisting virus risks and loose monetary policy stance of major central banks,” Kotak Securities said in a note.
Investors who want to invest in gold this Dhanteras also have the option of investing in sovereign gold bonds what are currently open for subscription. The issue price for Sovereign Gold Bond Scheme 2020-21-Series VIII has been fixed at ₹5,177 per gram of gold.
Gold and silver prices fell sharply today in Indian markets, continuing their weak trend of recent weeks. On MCX, December gold futures fell ₹800 or 1.6% to ₹48700 per 10 gram while silver futures tumbled 2% or ₹1,200 to ₹59,308 per kg.
In global markets, gold rates dropped to the lowest level in four months amid optimism over Covid-19 vaccine developments. US President-elect Joe Biden on Monday was formally given the go-ahead by a federal agency to begin his transition to the White House.
Spot gold was down 0.7% at $1,823.58 per ounce, having earlier slid to its lowest since July 21 at $1,820.45. It slumped as much as 2.2% on Monday. Silver fell 0.9% to $23.37 an ounce. Platinum rose 1.1% to $936.11, while palladium dropped 1% to $2,331.06.
Asian stock markets were mostly higher today as progress in developing an inexpensive coronavirus vaccine boosted hopes of a swift global economic recovery. AstraZeneca on Monday said the COVID-19 vaccine that it has developed in partnership with Oxford University is likely to be cheaper to make, easier to distribute and faster to scale-up than rivals and could be up to 90% effective.
Global risk sentiment was further boosted after news reports, citing sources, said that US President-elect Joe Biden plans to nominate former Federal Reserve Chairwoman Janet Yellen to become the next Treasury secretary – a move welcomed by traders particularly after incumbent Stephen Mnuchin last week sparked a spat with the central bank over access to virus relief cash.
After hitting a record high of ₹56,200 in August, gold prices have sagged amid vaccine progress and the recent outflow from gold-backed exchange-traded funds.
ETF investors continued to stay on the sidelines. Holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell 0.6% to 1,213.17 tonnes on Monday from 1,220.17 tonnes on Friday.
Data released on Monday showed US business activity expanded at the fastest rate in more than five years in November led by the quickest pickup in manufacturing since September 2014, fuelling optimism of a swift recovery.
4. Gold Price prediction of the future:
Motilal Oswal has a forecast of Rs 67000 in the next 12 months (October 27th, 2020). 10. The maker of a new cryptocurrency backed by Gold (Digix) says Gold is likely to remain between $ 2000 and $ 2100 in the next few months (Between Rs 51734 and Rs 54320).
Gold Price Prediction India: 10 Gold Price Predictions
Gold Prices are reported on a per 10 gm basis for 24 carat Gold.
- Bank of America has revised downwards its prediction for Gold and is now predicting Gold at $ 2063 by the end of 2021 (22nd Nov)
- Macquarie says that the cyclical bull market has come to an end and the bank expects Gold to fall to $ 1550 next year (21st Nov)
- Motley Fool Canada argues that one must reduce exposure to Gold and it is likely to head lower over the next year. (18 Nov)
- Goldman Sachs has updated its forecast on 13th November 2020 and is predicting Gold at about Rs 60472 per 10 grams by end of 2021 on the back of Emerging market demand
- According to investing.com, Banks have forecasted an average of $ 2013 for 2021 or Rs 52679 per 10 grams (November)
- Navneet Damani of Motilal Oswal “One can look to buy gold on dips towards Rs.47500-48000 with upside targets towards Rs.65000-67000 over the next 18 months”. He has repeated this forecast on November 12th
- ANZ Bank has put out forecasts as follows (assuming current INR USD exchange rate) – Rs 56907 by December 2020, Rs 59494 by March 2021 and Rs 49147 by end of 2021. Updated ANZ Forecasts claiming Gold will soar to $ 2300 early next year (Rs 59965 per 10gms)
- Motilal Oswal has a forecast of Rs 67000 in the next 12 months(October 27th, 2020).
- Wallet Investor has predicted a price of Rs 56167in one year (6th October)
- The maker of a new cryptocurrency backed by Gold (Digix)says Gold is likely to remain between $ 2000 and $ 2100 in the next few months (Between Rs 51734 and Rs 54320).
5. Should you invest in Gold?
A History of Holding Its Value
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. Since ancient times, people have valued the unique properties of the precious metal. Gold doesn’t corrode and can be melted over a common flame, making it easy to work with and stamp as a coin. Moreover, gold has a unique and beautiful colour, unlike other elements. The atoms in gold are heavier and the electrons move faster, creating the absorption of some light; a process which took Einstein’s theory of relativity to figure out.
The weakness of the U.S. Dollar
Although the U.S. dollar is one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for several reasons, including the country’s large budget and trade deficits and a large increase in the money supply.
Gold has historically been an excellent hedge against inflation because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years. This is because when fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to rise along with everything else. Moreover, gold is seen as a good store of value so people may be encouraged to buy gold when they believe that their local currency is losing value.
Deflation is defined as a period in which prices decrease when business activity slows and the economy is burdened by excessive debt, which has not been seen globally since the Great Depression of the 1930s (although a small degree of deflation occurred following the 2008 financial crisis in some parts of the world). During the Depression, the relative purchasing power of gold soared while other prices dropped sharply. This is because people chose to hoard cash, and the safest place to hold cash was in gold and gold coin at the time.
Gold retains its value not only in times of financial uncertainty but in times of geopolitical uncertainty. It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union. Its price often rises the most when confidence in governments is low.
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to Goldsheetlinks.com, gold saw a rebound in production with output hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years to bring a new mine into production. As a general rule, a reduction in the supply of gold increases gold prices.
In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world; it has many uses there, including jewellery. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold (though it has taken a tumble in 2012.) In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast.
Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust became one of the largest ETFs in the U.S., as well as one of the world’s largest holders of gold bullion in 2008, only four years after its inception.
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:
- The 1970s was great for gold but terrible for stocks.
- The 1980s and 1990s were wonderful for stocks but horrible for gold.
- 2008 saw stocks drop substantially as consumers migrated to gold.
Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
Investing in gold, whether the physical metal or gold-related securities, is a complicated decision and not one to enter lightly. If you do decide to purchase physical gold, make certain you are buying from a reputable dealer. If you are purchasing gold for your retirement account, you must use a broker to buy and a custodian to hold your gold.
As a general rule of thumb, financial experts often suggest that you not have more than a small percentage of your assets in gold. This is believed to be good advice because it acts as an insurance policy. If you lose all other stocks in a crash, your gold should follow historical trends and go up in value, keeping you from losing everything. But remember, that’s not guaranteed, so proceed with caution when buying this precious metal.
- the balance