Monday, February 18, 2013

Why Gold Prices Are Going Down?

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Gold prices have gone down significantly and are at 6 month low. GoldBees, Goldman Sachs Gold Exchange Traded Fund, was at Rs 2859 six months back and is at Rs 2857 at present. The gold spot price is Rs 30170 at present.

So, why is gold price going down?

There are lot of factors impacting gold prices. The first factor impacting gold prices is the stability of global economy. Even though, the global economy has not come out of the woods completely, especially Europe, it is definitely on the path of recovery. According to some analysts, US could be the next breakout nation and not the emerging markets. While emerging markets like India are going through slowdown, US is on the verge of breakout and may give better returns than emerging markets. This gives lot of confidence to investors and those investors who were earlier investing in gold just because they did not have confidence in dollar, would come back to investing in US and its businesses. When investors believe that economy is stable, they tend to invest more in stock markets rather than gold.

The second factor impacting gold prices in India is the government's focus on current account deficit. India imports lot of gold to meet the demands of local investors, who not only consider this as an investment but is also considered auspicious for important events like marriages etc. Gold prices in India are a factor of the global gold prices (in US dollar) and USD-INR forex rate. For eg., if global gold price is $575 per 10 gms and US dollar-Indian Rupee exchange rate is 53.5, gold price in India is 575 * 53.5 = Rs 30762.50. As global gold price and/or USD-INR forex rate goes up, the price of gold in India goes up too. It may so happen that the global gold price remains same but the Indian Rupee weakens and that may result in the gold price in India going up.

Over the last few months, the global price of gold has come down but may be not by that much as yet but the gold prices in India has touched 6 month low. The reason for that is the Indian Rupee has strengthened because of government's bold policy decisions which has attracted FDIs or foreign direct investments thereby getting more investors to buy Indian Rupee. The USD-INR exchange rate which had touched Rs 56 is now hovering at around Rs 53.5. In a bid to channelize idle gold to productive use, RBI has allowed banks to lower maturity from 3 years to 6 months for gold deposit schemes. Also, SEBI has allowed mutual funds to lend gold to banks. Earlier, government had raised import duty on gold as well. These moves clearly indicate government's intention to lower/stabilize gold prices in India.

The above factors could make investors shift their investments in Gold to other asset classes.
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