What are the reasons for large increases in the market price of gold from one period...

What are the reasons for large increases in the market price of gold from one period to the next?

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Expert Solution

The reasons for large increases in the market price of gold from one period to the next are:

(1) Impact of Exchange Rates - If gold is imported and the local currency depreciates against the currency from where the gold is imported, gold prices will increase in the local currency term. So, if the local currency depreciates too much there would be large increase in the market price of gold from one period to the next.

(2) Related with other assets' prices - When the prices of other assets such as shares become very volatile and the shares value is continuously decreasing, then other people normally shifts towards buying more gold and selling other volatile assets and then the demand for gold rises significantly. Then the market price of gold can increase with a large increase in demand but a constant or lower supply of gold.

(3) Depreciating US Dollar - When the dollar value depreciates, the gold prices increase significantly. When the value of dollar depreciates, the value of the currencies of other countries appreciates compared to the dollar which increases the demand for gold and also the people who invests in the US Dollar for getting higher returns in the future sell dollar when it is depreciating and buy gold which is more stable in nature.

(4) Consumption Demand - When the demand for gold rises significantly but the supply of gold remains constant or same as before, it increases the price of gold. Say, for example if many people buy gold in a festive season according to their culture, then for that particular time period, the demand for gold would rise significantly but the supply of gold would remain same as before. This would lead to the increase in the market price of gold.

(5) Inflation - In times of high inflation, the value of the local currency depreciates in value. So, people buy more gold so that it acts as a protection for the high inflation and this leads to the increase in the demand for gold which pushes the market gold prices up.

Rahul Sunny answered 1 year ago

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