Financial Chronicle takes a look at the key drivers of the gold surge.
Rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion's rally to historic highs. Gold's strong performance in recent years has attracted more players and increased inflows of money into the overall market. Investors, wary of the weak dollar and ultra low interest rates, are turning to gold.
The currency market plays a major role in
setting the direction of gold, as bullion prices move in the opposite
direction to the dollar. A weak US currency makes dollar-priced gold cheaper for holders of other currencies and vice versa. US Federal Reserve has said that interest rates will stay at zero for some time, which means the greenback will remain weak.
Central banks’ gold reserves
Central banks hold gold as part of their reserves. Buying or selling of the metal by banks can influence prices. On Tuesday, the Central Bank of Mauritius bought 2 tonnes, worth about $71.7 million, of gold from the IMF. Earlier this month, RBI purchased 200 tonnes for $6.7 billion. IMF is selling gold to shore up its finances.
The precious metal is widely considered a ‘safe-haven’, bought in
a flight to quality during uncertain times. Major geo-political events
including bomb blasts, terror attacks and assassinations can induce sharp price rises. Financial market shocks, which cause other asset prices to drop sharply, can also have a similar impact on gold prices.
Supply & demand
Supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stock of around 158,000 tonnes. Gold is not consumed like other commodities. Peak buying seasons in major consumer nations such as India and China have some influence on the market, but dollar and crude carry more weight.
Gold has recently had a strong correlation with crude oil prices, as the metal can be seen as a hedge against oil-led inflation. Perhaps, in anticipation of a possible decline in stocks and bonds due to the Opec cut, investors have started demanding gold. This spurt in demand may have led to higher gold prices. On Tuesday, oil held below $79 a barrel.