Gold for many a millennium has commanded the psyche of the Human race like no other commodity found in this universe. The most powerful emperors have donned it over their heads as a symbol of power, authority and opulence while others have fought bloody wars to gain possession of as much of this commodity as possible. Women wear it not only as an ornament, but its possession and display are a source of pride for them. The commodity has also been used as a currency for several centuries by many a country, and even today, it is valued as a reserve by central banks and as an investment vehicle by individual and institutional investors alike.
Gold has certain unique properties that give it such high value. It is one the most liquid of all assets, yet it is limited in supply, people purchase Gold both for consumption as well as for investment needs. Gold does not derive its value from any other underlying, yet other assets derive their value from Gold as the underlying asset. Gold has zero risk as it is a collateral in itself. Other than the above, there are some other critical secondary factors that are determinants of the value of this commodity; its demand as a risk-hedging instrument in times of volatility and inflation, its demand as an acceptable payment mode for redeeming a liability and as an investment asset to add to the long term value of the portfolio of an investor.
Despite the above properties, however, the prices of this commodity are subject to market wide volatility, mostly on account of speculative demand. Its prices are, however, determined by the below-mentioned factors.
Gold Price Determining Factors
- Consumption in the form of Jewellery – Nearly two-thirds of the world demand of Gold is in the form of jewellery. Traditionally India, China and the United States of America are the largest consumers of Gold as a commodity. In recent times with the rising prosperity levels in India, China and other South Asian countries, the demand for this commodity has been rising steadily.
- Industrial Use of Gold - Gold has unique chemical and physical properties as well. Gold has high thermal and electrical conductivity and well as resistance to chemical corrosion and bacterial colonisation. Nearly a tenth of the gold demand today is for industrial use, and out of this, a significant part is used for manufacture of corrosion-free electrical connectors for use in computers and other such sensitive electronic devices. Every cell phone in the world contains at least 50 Milligram of Gold. Gold is a good reflector of electromagnetic radiation and hence is used as a foil to cover satellites in order to protect them from the harsh radiating environment of space.
- Hedge in times of financial stress – Gold, like all other precious metals, is an effective hedging instrument against the risks of inflation, deflation and currency devaluation because of its characteristic of being accepted in lieu of money across political and economic boundaries. However, in recent times this feature of the metal has diminished on account of increased volatility in its pricing. However, in the long run, it provides significant price stability and return potential to investors intending to make it a part of their portfolios. Gold in an investment portfolio has an advantage of delivering positive long term returns as well as being the most liquid asset after cash itself which can help a trader meet any exogenous obligation.
- Gold as an Investment vehicle – Gold has since long established itself as a long-term value creator. There are several Exchange Traded Funds that exclusively invest in Gold, and its units are held by investors as hedging instrument in lieu of Gold itself. There are two significant areas from where the demand for Gold emanates; first its consumption as a commodity and the other as a storage of value. In times of economic volatility when currencies tend to lose their sheen, usually, Gold comes to the rescue and investors park their wealth here till better times prevail.
- Gold as a reserve – The central banks of the world and the IMF are also essential constituents who influence the prices of Gold. Most central banks keep a part of the wealth of the country with themselves as reserves. For them, it is imperative that the asset selected for value preservation must possess long term price stability along with wide acceptability as a currency. The only commodity that fits the bill on both characteristics is Gold. Led by the Federal Reserve of the United States of America most of the large economies of the world have stored hundreds of tons of Gold, in addition to IMF which also has ample storage of Gold, as it is considered to be the banker of central bankers.
- Production of Gold – The final determinant of gold prices is the mining and production of Gold. The largest producers of Gold are China, South Africa, Australia, Russia, Canada, the United States of America and Peru. Other than new metal production, a large portion of gold supply in the world also comes from recycling of the metal.
Gold prices for 2019 and beyond.
The demand for Gold in the past ten years has gone through a seesaw like oscillation. During the periods of 2011-13, the demand was at its peak led by growth in demand for Jewellery and Investment needs. The demand for the metal, however, started to fall thereafter to reach its lowest in the Fourth Quarter of 2015, and since then it has been slowly inching upwards to reach US$ 1489.0 per ounce on 5 November 2019 as per LBMA (London Bullion Metal Association) data.
The supply of Gold during the same period also followed the same cues as its demand, with maximum quantity coming from gold mining and purification companies followed by gold recycling companies.
The gold futures curves on 5 November 2019 were upward sloping with the 21-month future price of precious metal quoted at US$ 1528.60 an ounce at the London Metal Exchange.
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