What drives gold’s performance in the short term and how does it benefit you?

Investing in gold to achieve long-term financial goals is a common practice among avid investors across the world. Gold is proven to yield high returns in the long run, often outperforming other equity-linked assets. The upswing in gold prices during the current global economic slowdown has also got a lot of people thinking short-term as they sell gold to meet their immediate financial needs

If you are closely tracking gold’s performance to decide on your investments, understanding the factors that drive gold prices would help you anticipate the performance of gold and make the most out of your investments

Factors that affect gold prices and investor returns in the short term

1. Geopolitical tensions : Such events undermine investor confidence; for instance, the recent US-China tensions played a key role in driving investors to buy gold, even as the coronavirus crisis raged on.

2. Economic growth : When incomes increase, there is usually an uptick in the demand for gold for jewellery, long-term savings, and technology. In fact, in India, gold demand rises by 1% every time the national per capita income level rises by 1%.

3. Uncertainty and risk : Since gold is regarded as a safe-haven asset, it is a preferred option during market downturns. Market risk is subject to changes in relative flow of bonds and equities, assets held in reserve by central banks (In India, the Reserve Bank of India), international crude oil prices, inflation, inflation rate, and expected fluctuations in the value of gold.

4. Monetary policy changes : An increase in interest rates on government securities like sovereign bonds also affects investors' appetite for gold. Of the two, they tend to prefer whichever asset provides a higher potential for returns, after factoring in the effects of inflation. In times of economic crisis, gold is the safest option by far.

5. Opportunity cost : How investors perceive competing assets also affects the demand for gold, which includes bonds, currencies, and the stock market. For this purpose, 10-year bond pricing benchmark rates and equity performance in both developed and emerging market indices like S&P 500 and the Bombay Stock Exchange respectively are compared.To know more, read how gold compares to other asset classes.

6.Interest rates : When interest rates are low, investors prefer to exit other investments and park their funds in gold. However, gold always tends to perform positively in the long run, which makes a case for staying invested. To know more, read How has gold performed in the last 10 years?.

7.Momentum : The inflow and outflow of investment (equity and bond) into the economy and stock valuations can also affect investment attitudes towards gold. Returns from gold investments, COMEX futures positioning, and ETF flows are variables that primarily determine whether gold's performance will intensify or diminish.