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Factors that affect the Gold price

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1. Since gold is an dollar denominated asset, any adverse price reaction to dollar can cause sudden reversal in the price of Gold. When the US Dollar decreases in value, the price of Gold increases. Conversely when the price of the Dollar increases, the value of Gold decreases dramatically. When the value of Gold decreases, it can buy less Gold there by decrease in the demand for Gold.

 

2. Almost all the countries park a part of their reserve in Gold. Due to any major internal or external factors, any country say like America, Japan, China, or India started selling Gold then the price of the Gold collapse. With the sudden rush, price erosion for Gold can happen.

 

3. Demand-Supply ratio. Till date demand for Gold increases slowly but steadily. But the increase in supply is not commensurate with the increase in demand. From exploration to end product for Gold takes many years. If there is possibility of more reserves in the earth being discovered any time which may outstrip demand, the price of Gold may come down.

 

4. India being one of the largest consumer of Gold jewelery, any cultural variation among Indians can drastically affect the price of Gold. If Indians started thinking about Silver or Platinum Jewelery and its demand outstrips that of Gold, then the price can come down. If any Government enforces a bill restricting the amount of gold that a person can hold and strongly enforces law, then there will drastic come down in the price of the Gold.

 

5. Volatility in price of Gold. When there is drastic volatility in the price of Gold then the safe and less volatile nature of Gold decrease gradually. Then the risk averse investors may drop Gold from their portfolio.

 

Considering these entire factors one can safely assume the importance of Gold in their Portfolio. But ideally the one should allot less than 20% of their savings into Gold. It gives a stabilizing factor for your investment portfolio. Don't expect more than 5% return on your Gold portfolio. Any thing more than that is really a bonus. Always think rationally. When the price reach abnormal rates think about it rationally. After all Gold is a metal.

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