A PROJECT ON FACTORS AFFECTING CHANGES IN GOLD PRICES

Submitted by:
Gaurav Tandon JIML-10-059 Mainak Kumar Dhar-JIML-10-073 Mani Kant Tripathi-JIML-10-074 Shubham Agarwal JIML-10-140 Devashree Gautam JIML-10-142

Submitted to:
Prof Mahima Sharma

GOLD INTRODUCTION
Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the current global financial crisis, suggest that gold behaves more like a currency than a commodity.

Gold price

Gold Price History In 1960-2011

Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic regions or countries. Many European countries implemented gold standards in the latter part of the 19th century until these were dismantled in the financial crises involving World War I. After World War II, the Bretton Woods system pegged the United States dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold and made the transition to a fiat currency system. The last currency to be divorced from gold was the Swiss Franc in 2000. Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a twice-daily telephone meeting of representatives from five bullion-trading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day spot price, derived from over-the-counter gold-trading markets around the world

(code "XAU"). The following table sets forth the gold price versus various assets and key statistics:

Gold Year USD/ozt DJIA USD

World GDP USD tn

US Debt USD bn

Trade Weighted US dollar Index

1970

37

839

3.3

370

1975

140

852

6.4

533

33.0

1980

590

964

11.8

908

35.7

1985

327

1,547

13.0

1,823

68.2

1990

391

2,634

22.2

3,233

73.2

1995

387

5,117

29.8

4,974

90.3

2000

273

10,787

31.9

5,662

118.6

2005

513

10,718

45.1

8,170

111.6

2010

1,410

11,578

...

14,025

99.9

In March 2008, the gold price exceeded US$1,000, achieving a nominal high of US$1,004.38. In real terms, actual value was still well below the US$599 peak in

1981 (equivalent to $1417 in U.S. 2008 dollar value). After the March 2008 spike, gold prices declined to a low of US$712.30 per ounce in November. Pricing soon resumed on upward momentum by temporarily breaking the US$1000 barrier again in late February 2009 but regressed moderately later in the quarter. Later in 2009 the March 2008 intra-day spot price record of US$1,033.90 was broken several times in October, as the price of gold entered parabolic stages of successively new highs when a spike reversal to $1226 initiated a retrace of the price to the mid-October levels. On August 22, 2011 gold reached a new record high of $1908.00 at the London Gold Fixing.

Factors Influencing The Gold Price

Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. However unlike most other commodities, saving and disposal plays a larger role in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and massproduced jewelry, with little value over its fine weight and is thus potentially able to come back onto the gold market for the right price. At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 long tons; 174,000 short tons). This can be represented by a cube with an edge length of 20.2 metres (66 ft).

Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment (demand), rather than changes in annual production (supply). According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

Central banks: Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves. The ten year Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 500 tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, were key sellers of gold over this period. In 2009, this agreement was extended for a further five years, but with a smaller annual sales limit of 400 tonnes. Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. In early 2006,China, which only holds 1.3% of its reserves in gold, announced that it was looking for ways to improve the returns on its

official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices. It is generally accepted that interest rates are closely related to the price of gold. As interest rates rise the general tendency is for the gold price, which earns no interest, to fall, and as rates dip, for gold price to rise. As a result, gold price can be closely correlated to central banks via the monetary policy decisions made by them related to interest rates. For example if market signals indicate the possibility of prolonged inflation, central banks may decide to enact policies such as a hike in interest rates that could affect the price of gold in order to quell the inflation. An opposite reaction to this general principle can be seen after the European Central bank raised its interest rate on April 7, 2011 for the first time since 2008.[] The price of gold responded with a muted response and then drove higher to hit new highs one day later. A similar situation happened in India: In August 2011 when the interest rate were at their highest in two years, the gold prices peaked as well. Hedge against financial stress: Gold, like all precious metals, may be As used Joe as Foster,

a hedge against inflation, deflation or

currency devaluation.

portfolio manager of the New York-based Van Eck International Gold Fund, explained in September 2010: The currencies of all the major countries, including ours, are under severe pressure because of massive government deficits. The more money that is

pumped into these economies the printing of money basically then the less valuable the currencies become. If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

Jewelery And Industrial Demand: Jewelery consistently accounts for over two-thirds of annual gold demand. India is the largest consumer in volume terms, accounting for 27% of demand in 2009, followed by China and the USA. Industrial, dentistry and medical uses account for around 12% of gold demand. Gold has high thermal and electrical conductivity properties, along with a high resistance to corrosion and bacterial colonization. Jewelery and industrial demand has fluctuated over the past few years due to the steady expansion in emerging markets of middle classes aspiring to Western lifestyles, offset by the financial crisis of 20072010. Short selling: The price of gold is also affected by various well-documented mechanisms of artificial price suppression, arising from fractional-reserve banking and naked short selling in gold, and particularly involving the London Bullion Market

Association,

the

United

States Federal

Reserve

System,

and

the

banks HSBC and JPMorgan Chase. Gold market observers have noted for many years that the price of gold tends to fall artificially at the start of New York trading.

Exchange-traded products (ETPs): Gold exchange-traded products may include ETFs, ETNs, and CEFs which are traded like shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on

the Australian Stock Exchange, and originally represented exactly 0.1 troy ounces (3.1 g) of gold. As of November 2010,SPDR Gold Shares is the secondlargest exchange-traded fund (ETF) in the world by market capitalization. Gold ETPs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. However exchange-traded gold instruments, even those which hold physical gold for the benefit of the investor, carry risks beyond those inherent in the precious metal itself. For example the most popular gold ETP (GLD) has been widely criticized, and even compared with mortgage-backed securities, due to features of its complex structure. Typically a small commission is charged for trading in gold ETPs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time.

Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and UITs. The main differences are that ETFs do not sell directly to investors and they issue their shares in what are called "Creation Units" (large blocks such as blocks of 50,000 shares). Also, the Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF's portfolio. Usually, the Creation Units are split up and re-sold on a secondary market. ETF shares can be sold in basically two ways. The investors can sell the individual shares to other investors, or they can sell the Creation Units back to the ETF. In addition, ETFs generally redeem Creation Units by giving investors the securities that comprise the portfolio instead of cash. Because of the limited redeemability of ETF shares, ETFs are not considered to be and may not call themselves mutual funds.

Accounts: Many types of gold "accounts" are available. Different accounts impose varying types of intermediation between the client and their gold. One of the most important differences between accounts is whether the gold is held on an allocated (non-fungible) or unallocated (fungible) basis. Another major difference is the strength of the account holder's claim on the gold, in the event that the account administrator faces gold-denominated liabilities (due to

a short or naked or bankruptcy.

short position in

gold

for

example), asset

forfeiture,

Many banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency on a fractional reserve (non-allocated, fungible) basis. Swiss banks offer similar service on an allocated (non-fungible) basis. Pool accounts, such as those offered by Kitco, facilitate highly liquid but unallocated claims on gold owned by the company. Digital gold currency systems operate like pool accounts and additionally allow the direct transfer of fungible gold between members of the service.

Top 10 Factors That Affect Gold Price In India Today

1. Historical high demand for gold in India necessary to supply huge jewelry market is the number one factor affecting the price of gold in India. Gold jewelry in India is an integral part of many traditional ceremonies like weddings, festivals, celebrations and else. 2. India is also worlds largest importer of gold from other countries. Rising or lowering import costs inadvertently affect gold price in India today. India is unable to sustain adequate domestic gold production due to gold mine resource shortages. Currently theres only one working gold mine in India called Kolar that can not physically satisfy high gold demands of the country. Indias historical gold prices had always been higher due to this fact. 3. Rising population in India triggers even higher demand for gold driving gold price in India today even higher. 4. Due to low bank deposit interest rates, gold investment in India is a preferred method over any other investment mechanism. 5. The value of the US dollar is one of the major factors affecting gold price in India today. When the dollar is weak, the spot price of gold is on the rise and vice versa. 6. Worlds gold supply is one of the most important determining factors for gold price in India today. Once, worlds gold supply sustains production shortages due to depleting mineral deposits, the prices for gold will soar not only in India but all over the world. 7. Any favorable or unfavorable Government gold policy directly affects current gold prices in India. 8. India is known to be a country of parallel economy, money laundering and large scale tax evasions. Since this unaccounted money can not be kept in banks and the value of national currency is on the downfall, Indians prefer to buy gold jewelry or gold bullions to protect themselves from devaluation.

9. India is a country of contrasts where lavish palaces are mixed with shacks. Poorer layers of population prefer to keep their valuable assets in the form of gold jewelry so it can be easily carried in times of distress, floods and social unrest. 10. Worlds overall economic situation is a very important factor influencing gold prices in India. With many European countries being on the brink of bankruptcy like Greece, for example, or facing huge state budget deficits, multiple investors see gold as the only worthy commodity worth investing. If the worlds gold price is on the rise, it automatically affects Indian price for gold.