Three important reasons driving gold prices to new high

Investment

oi-Monika Nihalani

By Monika Nihalani

Published: Friday, June 10, 2011, 12:48 [IST]

The beauty of Gold has always enticed people even after 5000 years. It has always been regarded as sign of wealth, the more gold you have, the richer you are. Demand for gold comes from three different ways: 50% from consumption for jewellery, 40% from investment and rest 10% from industries for industrial usage.

Since 2001, price of gold has more than quadrupled, what are the reasons behind such rise?

Factors such as the value of the US dollar, demand and supply, inflation, security (wars, political unrest, etc), alternative investments, government buy/sell decisions, etc. are highly influencing the price of gold. Speculation in commodities market, fear and panic about the global crisis are some other drivers of high gold prices.

Three of the main reasons for high gold prices have been explained:

Demand and Supply:
The price of gold is largely determined by the relationship between demand and supply. Worldwide, demand for gold is exceeding supply in recent times. India and China heads when it comes to consumption of Gold. In 2010 consumption in China increased by 8% and it has imported 200 tonnes of gold in the first two months of 2011, these figures excludes the transactions in gold by the central bank within China.

Current situation in India, where inflation numbers are quite high, many Indians are investing their money into gold considering it as an 'alternative investment'. The recession has not affected the buoyancy of the Asian markets, which in turn has caused the price of gold to push up even higher.

On the supply side, Gold output in South Africa, the world's largest Gold producer fell to its lowest value since 1931, in short, supply is not pacing up with demand; so the prices are surging up.

Inflation and global crisis fear:
The fact cannot be ruled out, that the price of gold has risen well beyond the level of inflation over the past five years. For the last few years, the world economy has been hard hit by the credit crunch and crisis, especially U.S., Euro region and Japan. Investors, everywhere are looking for means to save themselves from losses and to have stability. Gold being hard asset whereas stocks comes under paper assets, so it has always been preferred by the investors to beat the inflation. To be specific, gold is hedge against the inflation.

Countries around the world are shrugging off raising the interest rates up because that may hinder the growth of the economy and that may result into further inflation. Thus, demand for gold is continuously increasing over the years as it is seen as a good way of protecting the real value of one's own money.

Furthermore, the recent outlook of inflation and weak economics conditions around the world suggests the prices of gold set to soar yet higher. Hence, investors will keep moving money from riskier investments to safe havens such as gold.

Weakness in Dollar:
Gold is generally traded in U.S. Dollar, which is FIAT currency i.e. the currency not backed by anything. There is an inverse relationship between the Gold prices and the Dollar, this means whenever the value of dollar falls, the price of gold increases. Speculators invest in gold to hedge against the dollar.

Recent statistics shows that there is continuous decline in U.S. Dollar which in turn is pushing up the prices of gold. Many people park their money in gold because of weak dollar. So when you see, that the dollar has been making a bit of come back, you can expect the prices of gold to go down.

And, it is always advisable to take professional help and guidance to buy gold for future investment.

OneIndia Money