Gold prices

  • October 14, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Gold prices

Subject: Economy

Context:

The World Gold Council has said that “gold wasn’t the crisis hedge it has often been historically, certainly when measured in US dollars”.

Details:

  • Prices of gold have remained low amid high inflation, rising interest rates, and the ongoing war in Ukraine
    • Gold futures fell to their shortest net position in four years and gold ETF outflows continued.

Causes of low price of gold:

  • Rate hikes by the US Federal Reserve-.
    • It leads to the dollar strengthening against major currencies making the market of gold more expensive.
    • Further rising interest leads to selling of gold, and people moving their money into fixed deposits and other avenues where returns are higher.

Will gold remain a safe haven?–Yes!!

  • Value stability-Gold is traditionally seen as a strong hedge against inflation and a safe haven during times of uncertainty.
    • As its value falls or rises relatively less than equities and some other risky asset classes and thus, it preserves its value better, and has acted as a safe haven as far as capital protection is concerned.
  • Acceptability and availability-gold is a generational asset and will continue to rise in the long term (because of the gap between demand and limited supply).
    • Investors should invest through sovereign gold bonds (SGBs).

Gold pricing:

  • Gold is dealt with by the four types of firms in the industry–exploration or development, mining, consumers and recyclers.
  • The 3 categories of consumers are industrial, jewellery producers and investors.
  • Gold prices are fixed on a daily basis:
    • It is an agreement between the participants in the market to buy and sell gold at a fixed price.
    • Gold Fixing is done at London Bullion Market Association-The prices are set daily at 10:30 am GMT and 3pm GMT in US dollars.
  • Types of prices-There are 2 types of prices, spot price and futures price:
    • Spot price-This is the current market price at which gold was bought or sold for immediate payment and delivery.
    • Futures price-This is the price at which the participants in a futures contract agree to transact on the date of settlement.
  • Sources of pricing-
    • The spot prices are sourced at:
      • OTC markets-This is a decentralized market of securities that is not listed in an exchange.
      • Large banks and bullion traders-They buy and sell gold as part of the trading process and thus resulting in a reliable source of spot pricing for gold.
    • The Futures prices are sourced at :
      • The exchanges are the primary source of gold futures prices. The major gold exchanges are:
  • TOCOM, Japan
  • Shanghai Gold Exchange, China
  • MCX, Mumbai
  • DGCX, Dubai
  • Istanbul Gold Exchange, Istanbul
  • COMEX, New York
  • Drivers to determine the gold rates

There are 6 fundamental drivers that help determine the gold rates. They are as follows:

  • Price movements of other commodities and the demand for these commodities. Indirect pricing of the production cost.
  • US and Global inflation which is driven by the rising money supply.
  • Twin deficits that result from trade and growth imbalances against the US. This culminates in a fear factor.
  • Activities of the Central Bank such as money printing, gold purchases and sales.
  • Real interest rates in the US, compared to inflation and wages.
  • Using the production or demand or inventory formula in the form of demand and supply.
  • Gold pricing in India:
    • Gold in India is primarily imported by banks at an internationally determined rate.
    • Banks supply this gold to dealers after adding their fee to it.
    • The Indian Bullion Jewellers Association IBJA then gets into the act of determining prices by speaking to the ten biggest gold dealers in the country.
      • These dealers give their respective ‘buy’ and ‘sell’ quotes, depending on the rate at which they purchased gold.
      • IBJA then takes the average of these ‘buy’ and ‘sell’ quotes and determines the gold rate for a particular day based on this average. 
      • This average rate is adjusted for local taxes and a rate fixed accordingly.
      • Dealers generally arrive at their ‘buy’ and ‘sell’ rates by taking the international cost of gold and multiplying/adjusting it to the exchange value of the Rupee and adding any import duties and taxes such as VAT. Dealers ensure that they add their margin to the rates they give, keeping in mind their requirements.
economy Gold prices