Factors effecting Gold price in 2011

Let us look at some of the factors affecting prices of Gold in India:

1. Gold Mining: The quantity of gold mined in a year will directly affect its price by the simple application of supply and demand mechanics. 2008 and 2009 saw a decline in gold production and it again picked up in 2010. But the production is still less than the 2006 production. The production number in 2011 is not out but doesn't seems very encouraging. Grasberg mine, Indonesia facing two strikes this year, the second of which is still unresolved.
2. Currency Fluctuations – Gold is traded all over the world, hence its price is maintained in USD. The recent USD prices have been fluctuating as it has its bearing on gold price. The US has seen major turmoil in its economy and this has affected the USD adversely. It is not expected to stabilize in the near future although it looks to strengthen a little on good job numbers.
3. Global Scenario – The current global economy is in doldrums. Europe is still clouded with uncertainty, US is still not stabilizing, China is not as strong as it was a year ago and India is also reflecting the unrest. This led to gold acting as a safe haven.
4. Inflation and Interest rates – With inflation on the rise and RBI hiking interest rates frequently, gold prices have become unstable. Rising inflation to increase in gold prices while rising interest rates lead to a fall in gold prices. The gold has still risen as the effect of inflation has been substantial as compared to interest rates.
5. Weak Financial markets – Gold is inversely related to stocks, bonds and real estate. The stock market has been showing volatile behaviour and this has again reflected in gold prices. Gold is still preferred as the others are not as safe as investments as gold.
6. Growing middle class - A factor unique to India is the growing middle class. This has also led to an increase in demand of gold thus leading to increasing gold prices.

With the current economic scenario gold will continue to remain a preferred investment option. The only word of caution to investors would be that gold is heading towards a bubble and thus needs to be handled with care.

Next: Gold demand trend in Q2, 2011

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Credit: Ms N Khanna