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1.

The Value of the US Dollar


One of the crucial factors which regulate the price of gold is the rating of the U.S. dollar.
There is an inverse relation between value of dollar and price of gold. When the dollar gets
stronger, gold price falls, and when the value of dollars is weak, gold price rises high.
However, the U.S. monetary system plays a significant role in controlling or shaping the
global economics and even the gold price.
At present, since the U.S. economy is suffering due to poor market situation and sentiments
and the rating of dollar has also fallen down, chances are high that gold will become more
expensive.

2. Inflation
Inflation is the discussed topic of every Indian Household. From rising price of gas to gold,
everything is falling hard on the shoulders of Indian men and women. Taking into account the
trend of price rise gold in the past years, it is quite shocking to note that in the last 33 years,
gold rose 32 times to reach 32,000 per 10 grams on sep 2012.
Looking at the current rate of inflation which is 7.18 percent, may also push the price of
yellow metal in the near future. But there is also a positive aspect of Inflation, such as if you
invest in gold today, after 20 to 30 years the bullion will definitely return you much more
than the money you invested.

3. Demand for Gold in Greater China and India


The largest consumers of gold in the world are Greater China (China, Hong Kong and
Taiwan) and India. Since the demand for gold in these countries remains high, Gold easily
trades in the market despite being expensive. In case of India where gold holds an important
part of rituals and ceremony, a slight increase in gold price does not affect the buying
sentiments of the consumers.
As in the Hindu Culture, few day in a year are considered auspicious for buying gold like
Akshaya Tritiya, Dhanteras and Lakshmi puja, traders will keep gold prices high during these
days to earn extra profits out of lofty demand.

4. The Production of Gold

Gold is produced from mines located in the entire six continents except Antarctica, where
mining is banned. The last five years records show an averaged approximately supply of gold
i.e. 2,602.2 tonnes per year from gold mines. This stability of production is primarily
resulting from the fact that when new mines were discovered, theyre mostly used for
replacing the existing mines production, instead of expanding the current global production
levels.
However, this inelastic in production of gold, often fails to meet the rising demand for bullion
in the world market. So to keep the demand under control, trader may increase the gold price
in 2013.

5. Central Bank
Central bank of every nation plays a key role in monitoring the price of gold. If the central
bank provides a lower rate of interest on deposits, the demand for gold increases which also
pushes up its price. As the individuals are discouraged by the lower interest rates of paper
currency; they flip towards the golden metallic as it has potential for continued price
appreciation, making it a good prevaricate towards inflation.
But if this year central bank decides to offer higher rates of interest, the gold price will fall as
this positive rate of interest will compensate for the decline in the value of paper money via
inflation.

Why is Current Account Deficit so bad this time?

Indias current account deficit (CAD) touched a record high of $ 32.6bn or 6.7% of gross
domestic product for the quarter to December 2012. This deficit occurred because more
money was paid out of India than brought into the country.If a country primarily imports
more than it exports, it runs a current account deficit.
The Reserve Bank of India governor, D Subbarao said last month that the sustainable CAD
for India is 2.5% of GDP. Finance minister, P Chidambaram has said that such a high current
deficit
was
worrying.
This has raised concerns over the impact on the economy.
Here are pointers that could explain the situation:

Quality of Indias imports is worrying: An economy that is growing at a faster clip


than other nations has high imports and usually runs a current account deficit. The
RBI governor, D Subbarao has expressed concern about the quality of imports. He
argued in a speech last month that if a country imports more capital goods, it means
there is an increase in the economic activity. Companies import capital goods
equipment only when they expand capacities. However, Indias imports primarily
include oil and gold. These two commodities do not help any manufacturing and

export growth. Indias oil imports rose despite an overall economic slowdown. India
also continued to import gold as demand stayed high. This was despite the additional
duties imposed on import of gold.

No signs of exports growth: Indias overall trade deficit stood at $ 59.6bn during the
quarter to December 2012. This is the excess value of imports over exports. Indias
exports fell marginally due to an overall slowdown in demand for goods and services
overseas. With overall slowdown in the global economy, there are few signs of a sharp
surge in exports

Impact on the Rupee: A high current account deficit puts pressure on the value of
the rupee. However, the Indian rupee has not witnessed a sharp fall so far. This is due
to strong flows from foreign institutional investors into equity markets as well as
foreign direct investment by companies. This largely finances the current account
deficit. The RBI also ensures that the rupee does not fall sharply, as this could
increase the inflation in the economy. It conducts periodic intervention in the foreign
exchange markets by selling foreign currency and buying the rupee.

What is government doing? Finance minister, P Chidambaram was in Tokyo this


week. He said that the Indian economy could easily absorb close to $ 50bn in foreign
direct investment and more in foreign institutional investment. He was in Japan to
woo foreign institutional investors to India. Ahead of the presentation of the budget in
February 2013, he went to Hong Kong and London. The RBI governor, Subbarao has
cautioned against depending too much on volatile foreign flows. He said in his speech
in March 2013 that the country was exposed to the risk of a sudden stop and exit of
capital flows. Should the risk of capital exit materialize, the exchange rate will
become volatile causing knock-on macroeconomic disruptions, he cautioned