Optimal strategy for Indian gold buyers in a volatile gold price regime

Abstract

Gold has been a coveted commodity since ages for its ornamental value, rarity and resistance to corruption. These properties have made gold a currency of choice throughout the world. Gold is no longer seen purely from a jewelry point of view, but also seen as an alternative asset class for investment. Several characteristics of gold such as it being an active hedge against inflation, its low correlation with other asset classes resulting in good diversification, etc. have enhanced its value from an investment point of view. In addition, gold is also used by industries such as electronics, nanotechnology and gold-plating. All the players in the value chain, right from miners to the end consumers, are affected by the fluctuations in gold prices. Gold being an internationally traded metal with high liquidity, there are several factors that affect movements in its price. The objective of this study is to identify several factors which have a significant impact on gold prices, and to develop a quantitative model based on these factors that would help in making a better forecast of gold prices in the future. Moreover, several new factors affecting gold prices such as the rising income levels in the emerging economies, weakening US dollar, etc. have come up in the recent past. The study intends to analyze how the impact of different factors has changed over time and build different models to quantify the same. This study would be beneficial to all participants in the value chain, and would help them decide whether or not to hedge against fluctuations in gold prices.