The complexity of Gold prices.

I checked the gold rates again this morning..! I think it is more out of habit which was instilled in me during my undergraduate years when i used to sit with my dad infront of the tele watching 'bloomberg' or the 'Business plus'

I have been following the gold prices well if not quite closely then close enough to potray an overview of the last few years. What really drives the Gold prices? According to Donald Doyle Jr of Blanchard, there are five key factors, supply and demand, weakness in the dollar, the balance between gold and oil prices, institutional buying and uncertainty over the economy.

I would just like to present an overview of the last 10 years data. Gold prices were fairly stable around $300 between Jan 1999 to the end of Jan 2002. Then between Jan 2003 to Jan 2004 the rates fluctuated $300 and $400 and by the end Jan 2006 the rates reached around $600. From the end of Jan 2006 to the begining of 2007 there was a fluctuation of a $100 in the gold prices. From July 2007 their was a steep climb in the gold prices they increased from $700 to $900 by the end of Jan 2008. On March 13th 2008 Gold touched $1000. At this occassion there were even talks that Gold would soon cross $2000.

Supply and demand according to 'UBS metal strategist Robin Bhar' was no longer the factor and one of the reasons was said to be that the Dollar was a 12 year low at that point compared to the yen with other reasons also including the Global financial crises. At this point, the investors felt safer to put their money in a commodity such as Gold. But soon after that that was a steep fall and Gold was back again to $900. Between July 2008 to January 2009 alone the gold prices pluged from over $950 to $850.

But the most important part of the story is not just the variation between the duration of July 2008 and January 2009 but the amout of variation each day and during each month. From mid July 2008 to mid august 2008 alone the gold fell over $125 and between end of august to the end of september Gold climbed around $150. And most astonishingly from within a week from 30th September'08 to 6th of Nov'08 gold pluged around $175.

The interesting thing to note here is that gold with such variations have increased the chances of being risky as a short term investment. Where on one side within a month it could make you earn as much as $150 an ounce it can also make you loose the same amount in a matter of just a week.

I guess there are more than just the five factors as explained by Donald Doyle. Gold prices are not as easy to determine and predict as they sound to be. They are complex. For instance, if we say that there needs to be a balance between the oil and the Gold prices. Right now there isnt any. From my early days, when i started to read articles related about Gold. The researchers presented a simple formula to predict Gold prices. Gold prices being directly propotional to crude oil and inversely propotional to the Dollar.

During the past few months, it has been witnessed that the crude oil prices are at an all time low where as the gold prices are around $800-$850. Whereas, the dollar is not in an entirely bad condition and is seen strenghtening as well.

Economic conditions are one of the factors behind such an investment. Investors feel that their money would be safe with a commodity rather than a foreign currency as their might be risks with the economic and financial conditions of that country. The five factors do play their roles but at.

I guess one of the major reason behind the fluctuation is the speculation in the market and it does not seems like a fair game any more. Economic conditions, recessions were faced earlier as well. But variations like these were hardly seen before. If we look at the date, then the Gold price between $700 to $800 looks a fair trend. However, reaching $900 or above is a level that is just a hype.

Gold is still an investable commodity. In my opinion it is one of the safest long-term investment. But there are many big buyers in the market and the demand and the supply now goes not only to the big buyers but also to the countries. And when the countries become the buyers or seller (to stablize their currencies) then the market can reverse any time.