Gold Futures Prices and Hindu Festivals

We noticed recently that someone posted a question on WikiAnswers: “What influences the price of gold?” to which someone else posted the answer: “Oil.  ” Well, it would certainly be nice if there were a one-word answer that would clearly explain and predict volatility in the gold market, but nothing in the Markets is that simple.   Even if changes in the price of gold often seem to track with the price of oil, it simply suggests common influences and complex interactions.   So what really makes gold and gold futures prices rise and fall?

(Disclaimer: Seasonal factors of supply and demand are typically built into futures prices.)

Hindu festivals
Seriously.   India is the number one consumer market for gold in the world.   Demand peaks around two Hindu holidays which are considered auspicious dates for buying gold jewelry: Akshaya Thrithiya occurs in spring and the even more important Diwali, the “festival of lights,” is in autumn.   This may help explain a persistent seasonal rhythm in gold prices, which generally rise in spring, and slip or steady in summer before experiencing even sharper gains in the fall.  It is important to note that the seasonal factors of supply and demand are typically built into futures prices.

Faith in the U.S. dollar
As a currency of considerable global influence, changes in the relative worth and stability of the dollar affect gold prices.   When the dollar’s value falls, investors buy gold as a hedge against inflation.   When faith in the dollar falls, people buy gold as a hedge against government fiscal irresponsibility.   Demand and prices rise.

Unemployment and tourism
Rising unemployment in major markets and declining tourism in certain wealthy retreats like Dubai both decrease the retail demand for gold jewelry and gifts

Electronics demand
Since gold is used in the manufacture of electronics, a large increase in electronics demand and supply can affect gold prices.

Scrap flows
In recessionary periods, more scrap gold enters the market as people turn their old gold jewelry into cash.

Investment risk aversion
When the stock market looks too risky for many investors, they turn to gold, but when the stock market begins to climb out of a trough, money flows out of investment gold and back into general stocks.

Credit availability
Recessions and credit crunches lead to pull-backs in copper mining.   Since much of the world’s fresh-mined gold is a byproduct of copper mining, this squeezes the supply of new gold even beyond its chronically tight state.   Other conditions which impact mining, such as power shortages in South Africa, also affect supply and price.

Chinese hedging
Beijing announced in April 2009 what many had long suspected.   Looking to reduce its exposure to U. S. bonds and currency, the Chinese government had increased its National Gold Reserves by 75 percent since 2004.   This announcement of Chinese hoarding, along with its public criticism of the international dollar standard, was followed by gold prices moving sharply higher.

Oil and Watergate
All right, yes.   The price of oil can influence the price of gold.   Higher energy prices can lead to financial instability, which can lead to more demand for investment gold.   An event such as Watergate in the early 1970s can influence gold prices by creating political instability, which can lead to financial instability, and so on.   In other words, any major destabilizing event in the global arena can impact the gold market.

However, even with all these real-life influences, it’s important to realize that gold prices are most affected by the actions and reactions of the people who trade gold contracts on the futures markets.   The price at which physical gold changes hands is almost always based on the price at the New York exchange.   That means that supply and demand in the physical market doesn’t directly move gold prices.   Supply and demand in the physical market influences futures traders who influence supply and demand in the exchanges…, which ultimately is what moves gold prices. 

*Trading commodity futures involves risk and sometimes those risks may be substantial. Only risk capital should be used. The use of options and options trading involves a high degree of risk. The use of stops may not limit losses to intended amounts.