Global Factors Favour a Rise in Gold Prices

Circumstances Driving Demand for the Yellow Metal Include Increasing Crude Prices and Us-led Inflation Fears
 

- Jayant Manglik

Gold is in the news, again. 2016 was a year of uncertainties, which works well for gold prices as investors rush in. Unexpected outcomes in the Brexit poll and the US presidential elections were topped by the most improbable geopolitical alliance [US and Russia] that led to a spike in the price of crude oil; these three essentially formed the basis of the uncertainty. However, this still does not take into account the likely significant changes in US policies under the new president [Donald Trump], adding to the ambiguity of the global situation. With most parts of the world still struggling on the economic front, it is a difficult situation for most assets except gold. Comparatively, there is less uncertainty in India, but the dynamics that drive gold prices are fundamentally global.

The major factors that affect it—strength of the US dollar and Federal Reserve System (Fed) interest rates, EU’s and Japan’s monetary policies, inflation and geopolitics— are all moving parts that combine and determine the price of gold in international markets. For India, it is this dollar-based price of gold, plus the significant impact of the rupee-dollar exchange rate, from which gold derives its rupee price. Taxes such as import duties only add to this. This is because we import 99.9 percent of the gold consumed; local mine production is miniscule in comparison. Since gold is the largest import item value-wise after crude oil, international gold prices affect our current account deficit, which is why gold import is a contentious issue.