Finance & Loans

Which factors contribute to volatility in gold price?

Gold has always been one of the most preferred options for investments for many Indians, regardless of social or financial status. As per data by World Gold Council, the annual demand for gold in India is 25% of the total demand worldwide, making India the principal consumer of gold globally.

In recent times, investors have seen fluctuations in the price of gold. The stock market collapsed due to the Covid-19 pandemic and the lockdown that followed in March 2020, after which gold price crossed the Rs. 50,000 per 10 gram mark by July 2020. Since then, the price of gold has fallen and risen multiple times.

Factors that affect gold price

As per World Gold Council, 30% demand for gold is driven by investments. The annual data from 1990 to 2015 presented by the council proves that gold demand rises with income levels. For each 1% rise in income per capita, gold demand also rises by 1%. For every 1% increase in the price of gold, demand falls by 0.5%.

Due to the rise in inflation, the currency value decreases. Hence, gold turns out to be a hedge against such a situation as it’s not easily influenced by currency fluctuations. This yellow metal is dealt in US Dollars in the international markets. When gold is imported, USD is calculated as per the prevailing exchange rate. So, the variation between USD and INR also adds to the volatility of gold price.

Why invest in gold?

  • Even if the economy slows down, investors look to invest in gold to safeguard their finances from uncertain events
  • Gold investments generally offer a relatively higher liquidity
  • Gold prices could fluctuate in the near or short-term. However, in the long term, gold prices have historically only moved up

Looking to invest in gold?

If you are looking forward to investing in gold, it is likely that buying jewellery or gold coins or bars are your first choice. However, these come with certain drawbacks like safety or even the making charges for jewellery.

There are several alternatives to buying physical gold. These include gold ETFs, Sovereign Gold Bonds (SGBs) and gold mutual funds. All of these have certain benefits as well as limitations compared to others. However, these are certainly better than physical gold, due to the safety (from thefts) they provide to your investments.

Depending on your risk appetite and the financial goals you want to achieve, you could select one or more options that better suit your need. You could also enlist the services of a financial advisor to help you to make informed investment decisions that align with your financial dreams and risk profile. Reach out to an advisor today and get started or make your investment journey more fruitful.

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