Fundamental Analysis of Gold By Neal Bhai

Gold is now sought after not only for investment purposes but also for many other industrial usages. India is among the world’s major gold customers, accounting for around 25% of global physical demand. Normally, yellow metal demand increases throughout the festival and cultural occasions, causing the gold price to rally. While demand influences the price of gold, fundamental analysis of gold also have an impact on the yellow metal’s price.

Factors Effecting Fundamental Analysis of Gold

Annual data between 1990 until 2015 of World Gold Council indicated important factors for gold demand. These factors effect the fundamental analysis of gold.  The demand for gold is primarily and principally driven by income levels. Gold demand grows by 1% for every 1% increase in per capita income. The price increases with the gold purchases. Gold demand declines by 0.5% for every 1% rise in price. The gold price (as of March 2021) was over $1,700 per ounce, down more than $300 from September 2020. But still substantially higher than values below $100 recorded 50 years before. What are the factors affecting the gold and driving up the gold price?

Reserves of Central Bank As Fundamental Factor 

Central banks maintain reserves of paper currency and gold. The price of gold generally rises as central banks diversify their monetary reserves away from paper currency and towards gold. Several major countries have reserves that are largely made up of gold. Global central banks have acquired the most gold since the United States abandoned the gold standard in 1971. According to Bloomberg’s fundamental analysis of gold, with 2019 figures lower than 50-year-high set in 2018. According to the WGC council, in 2019 Turkey was the greatest importer of gold. The next were Russia, Poland, and China. Overall, governments purchased 650 tones of gold in 2019, a slight decrease from the 656 tones purchased in 2018. This is still approaching the highs not seen in 50 years.

U.S. Dollar Value For Fundamental Analysis of Gold

As gold is priced in US dollars, its price is typically inversely connected to the value of the US dollar. According to fundamental analysis of gold when everything else is equal, a stronger US dollar tends to lower gold price. Whereas a weaker US dollar is likely to drive gold prices higher. It is because more gold can be bought when the dollar value is weak. The inverse connection exists because a declining dollar boosts the value of other currencies. This raises the demand for metals like gold. It also increases the price of gold. Second, as the US currency begins to lose value, investors search for safe haven assets like gold.

Therefore, the yellow metal is frequently seen as an inflationary hedge. Inflation occurs when prices rise, therefore when the price increase the value of the dollar declines. As inflation rises, so does the price of gold, resulting in more investment in gold.

Interest Rates and Gold Prices

As per some business analysts, the rate of interest and gold has a negative relationship under normal conditions. A rising yield suggests that the economy is expected to be robust. Inflation is caused by a robust economy, Gold is seen as an inflationary hedge. That makes it one of the factors affecting gold prices. Furthermore, due to the rise in interest rates, traders flock to fixed-income investments.  Therefore, demand falls while prices stay unchanged.

Jewelry and Industrial Demand for Gold

The WGC claims jewelry accounted for over half of global gold demand in it does not get such a result in 2019. Which reached more than 4,400 tons. In terms of volume, India, China, and the United States are major consumers of gold. Another 7.5% demand is due to gold’s technological and industrial applications. Where it is utilized in the production of medical devices. As a result, gold prices and investing in gold may be influenced by the fundamental supply and demand principle. As demand for consumer items such as jewelry and electronics rises, so will the price of gold.

In India, the yellow metal demand is intertwined with culture, tradition, and the need for financial security. According to research commissioned by the WGC and the FICCI, Indian consumers see gold as both an investment and an ornament. When asked why they acquired gold, over 77% of respondents mentioned investment safety as a consideration.

Rural Gold Demand

Rural demand is significant in the country’s overall demand for gold, which is largely determined by monsoons. Every year, India consumes gold over 800-860 metric tons, with rural India accounting for 60% of total consumption. As a result, the monsoon has a big influence on gold demand so if the harvest is excellent, farmers would utilize their earnings to buy gold. Farmers, on the other hand, tend to sell the gold to generate funds when the monsoon is insufficient.

Rupee-Dollar Impact on Gold Prices

The Indian Rupees and the US dollar equation influences the gold rates in India. But it has little effect on worldwide gold prices. Because gold is mostly imported, If the Indian currency falls contrary to the US dollar, the price of gold in Indian will increase. As a result, A falling rupee may lower the country’s demand for gold. While, that changes in Rs-USD prices do not affect the price of gold in US dollars.

Protection of Wealth

When the economy is uncertain, more people turn to gold as an investment because of its long-term worth. This makes it one of the factors affecting gold. During tumultuous times, gold is frequently seen as a “safe haven” asset for investors. Therefore people desire to make investments in gold or purchase gold to safeguard themselves against uncertainty. Because they prefer tangible assets, Indian people regard gold as a safe haven. When projected or actual returns on bonds, stocks, and real estate decline, demand for investing in gold rises.

Gold may be used as a hedge to safeguard against financial crises. Furthermore, gold is thought to provide security during times of political unrest. According to fundamental analysis of gold, most investors would buy gold whether the domestic economy was expanding or in crisis. Which highlights gold’s attractiveness as an asset for both good and bad times.

Geopolitical factors for Fundamental Analysis of Gold

Gold often performs well during the geopolitical upheaval. The present issue over North Korea’s nuclear capabilities has increased the yellow metal’s prospects. War has a negative influence on the prices of other asset classes. But it has a favorable impact on gold prices because the demand for gold increases.

Investment Demand and Gold Fundamental Analysis

Gold is also in demand from exchange-traded funds. This keep the metal and issue shares for investors to purchase and sell. The largest is the SPDR Gold Trust (GLD), which owned approximately 1,078 tones of gold in March 2021. According to the WCG, gold purchases through various investment vehicles. A total of 1,271.7 tones in 2019, accounts for more than 29% of global gold demands.

Production of Gold

Australia, Russia, China, South Africa, the United States, and Peru are all major participants in the global gold mining industry. According to the fundamental analysis of gold, the price of gold is affected by global gold output. Which is yet another example of supply matching demand. In 2018, gold mining output was around 3,260 tones, up above 2,500 tones in 2010. Despite the ten-year increase, gold mining production has not moved significantly. Which makes it a significant factor affecting gold prices.

One explanation for this is that “easy gold” has already been extracted; miners must now dig deeper to reach quality gold reserves. The fact that gold is more difficult to obtain creates extra issues. The miners are subjected to greater risks, and the environmental effect is amplified. In short, it is more expensive to obtain less gold. These raise the expenses of gold mine operations, which can lead to higher gold prices.

Other Assets Effecting Gold Fundamental Analysis

Gold has low to negative correlation with all major asset classes. Some economists believe gold is a particularly effective portfolio diversifier. Nonetheless, gold has no statistically significant correlation with traditional asset classes. However, others argue that there is evidence that when stocks are under stress, an inverse connection between gold and equities might arise. Gold protects one’s portfolio against volatility. Because the factors that affect the returns of other asset classes do not have a major impact on gold.

Conclusion

Global gold demand is expected to exceed supply by almost 1,000 tones, as per some forecasts. As there will be no additional mining capability in the future, the vast majority of gold is recycled. As a result, a reduction in the supply of gold is a further factor affecting gold prices. The inflation increase in the global economy is also bullish for gold prices.

Fundamental Analysis of Gold By Neal Bhai via @goldsilverrepor
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