InvestorQ : I have seen gold prices going up sharply in the market. I presume gold is driven by international factors. Why is gold rising so fast?
manisha Kolvenkar made post

I have seen gold prices going up sharply in the market. I presume gold is driven by international factors. Why is gold rising so fast?

Answer
user profile image
Mahima Roy answered.
1 year ago


You are right that gold has touched a multi-year of $1439/oz in the world markets and even in the Indian markets it is at a multi-year high. In the last 3-4 months, gold is up by nearly 22%. Actually, there are some important factors that are driving these gold prices higher.

· With the Iran shooting down the American drone recently, the geopolitical risk has increased. There is a worry that this could snowball into a full-fledged crisis. Be it the chaos post Lehman or the European default, gold has been the natural beneficiary. Already, Middle East and West Asia are on a boil with Iran and Saudi Arabia in direct confrontation. This is helping gold prices move higher.

· Recently, the RBI has been cutting rates and the Fed has been talking about lower rates in the US also. This is also helping gold prices go up. When interest rates are low and there is more liquidity, it is not great news for financial assets and is prompting a shift to gold. With low rates of interest, there is no opportunity cost in holding gold, which is driving gold demand. You must also have read that the US yield curve is negative and countries like Japan are paying negative interest rates. All these are driving gold prices higher.

· Lastly, central banks are buying gold as they see more safety in holding gold than in dollars. The central banks of China, Russia and India have been shifting some of their dollar reserves into gold and that is also shifting sentiments in favour of gold. The dollar has been under pressure and gold is normally an anti-dollar trade.