Why does Gold Price go up and Down so frequently?

Like the prices of petrol and diesel, the Gold Price also changes frequently on a daily basis. Have you ever wondered why this happens? What happens when you are sleeping, what happens when the market opens in the morning, how it becomes expensive or cheap? Here we have tried to find out the answers to these questions. The price of gold depends on many things. Economic and political reasons are the most important among them. These can be both local and global. If our country’s government has implemented a new rule related to gold import, then its impact will be on the price of gold. Similarly, if the production of gold in a country decreases in a year, it will also have an impact on the price of gold in the domestic market. Similarly, there are many such incidents in the country or abroad, which affect the gold price. Apart from the above mentioned economic and political reasons, many other factors affect the price of gold. These include the performance of the stock market, dollar value,  increase or decrease of gold consumption in the world, the war between countries, etc.

 Below are the factors that Impact Gold Price:

Gold Price

1.Demand and Supply:

 

In earlier times, there was no money. People used to exchange one commodity for others. This system is known as ‘Barter System’. When anyone needed lands. They used to Capture the vacant land. In short, the value of goods was extremely marginal and people used to get anything with relative ease.

The population started burgeoning every single year. Therefore. demand for goods started shooting up and goods needed for subsistence fell short. We will understand this with an example.

Suppose, you have one plot and government issues a notification that, they are planning to construct Airport, mall or a Highway in nearby areas of the plot. Consequently, the demand and value of the plot will start to go through the roof. People who want to invest in areas nearby government project, they will be willing to give you with double and triple for the lands you own.

Dimensions and location of the lands are still the same but due to increasing demand to own the and, it’s value started increasing exponentially on a regular interval. If in future government releases another notification announcing that they are planning to construct Highway, Mall or Airport not near the land you own but far distant away from the land. Subsequently, the value of the land which was trading at 3 to 4 times its value will suddenly start shrinking. This is what is called ‘Demand and Supply’.

If you love in India, you must know that during Wedding season and Diwali people starts to flock Jewellery stores and buys Gold in Bulk. Hence, during these times demand for the Gold increases and so is the price.

Similarly, Vendors and Wholesalers create a stock of Potato and Onions (things are used by billions of Indians on Daily basis). As they create a deficit of the most wanted goods in the market, the value of Potato and Onions will start to rise. People don’t have any other option to buy these goods at inflated prices.

 

2.Economics:

 

Economic Condition of the country also plays a huge role in fluctuating Gold prices. If the Government creates a lot of jobs so that all the people in India are employed. Hence, nobody would be unemployed. As a result of this more people will start to work and ultimately Gross Domestic Product(GDP) of the country will rise.

It will bolster the economic condition of the country. As the GDP of the country rise, the Currency of the country will be highly valued. If the value of the currency increases, it will have an inverse impact on the Gold prices. Gold prices will start to fall rapidly.

 

Gold price also depends heavily on Government policies and decisions. If the government increases the tax on the goods manufactured as well as imported in the country. Invariably, it will have an adverse impact on the price of the Gold. Thus, the Gold price will start increasing.

Moreover, if a country faces a heavy recession which means production within-country reaches an all-time low. All the goods in the country will be more expensive. This is also the reason for the increase in Gold price. Also, Inflation and deflation are also one of the major reason for fluctuation in Gold prices.

 

3.Monetary Policy:

 

Monetary policy of the country is also a telling factor which results in fluctuation of Gold prices. If banks increase interest on the deposits to the extent that money gets doubled in a matter of 2-3 years. As a consumer, you have two options: either deposit as much money in the bank as possible to earn higher interest or buy gold.

Think logically, as Interest from the bank is doubling you capital whereas investment in gold is not going to give anywhere near returns. Hence, the natural tendency of the people is to put money where they are expected to get higher interest. As a result of this, Demand for gold will reach an all-time low. Low demand will reflect in the gold price and price of gold will fall.

Inversely, if the bank reduces its interest rates to the extent that it is hardly 2-3 %. Hence, people will turn their back toward banks and will invest in gold thinking that it will at least give more interest than the banks. Increasing demand will reflect on the gold price.

Thus, Gold prices will start to shoot up.

Therefore, alteration in Monetary policies reflects in the price of the Gold.

Also, the Gold price depends on the value of the currency. If Indian rupee is depreciating against the US dollar, then people within the country have to pay more money to buy Gold. Similarly, if Indian Rupee is able to withstand the US dollar and starts improving its worth, then people within the country can buy Gold at a lower price.

 

4.Geo-Politics:

 

Gold price within the country is also impacted by politics around the world. Assume, a country is lashed with a terrorist attack which brings that country to its knees. In such a situation, the country faces the basic problem of subsistence. All the progress made over the years will come to standstill.

Production within the country will take absolute beating and GDP of that country will start receding. It will take hit on all accounts and the value of the currency will fall. In such a situation, people will think that anytime the value of the currency might diminish and reaches zero, it is better to buy gold. They can sell their gold at a better price in any country across the globe. In this case, due to the extreme demand for the Gold, the price of gold will increase.

Another scenario, if the economic powerhouses like the USA, China, and Russia faces economic turmoil due to the terrible performance of the Big companies in those countries. In such a case, the value of the currency in those countries will be weaker and people will start investing or buying gold. High demand for gold will lead to rise in Gold price.

 

5.Psychology:

 

Psychology of people also plays a huge role in the increase and decrease in Gold prices. If due to an economic slowdown or any other development, people get an intuition that Gold price is at a lower level, they will start buying Gold in bulk. This sudden demand for gold will result in an increase in the gold price.

Seeing higher gold prices people will move to other forms of investment which will result in lower demand for gold.it will result in a fall in the Gold price. This process is cyclical.

 

Gold Price depends upon many factors as discussed above. In order to buy Gold at the lowest price possible, it is imperative to be cognizance of these factors.

 

 

 

 

 

 

 

 

 

 

 

 

 

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