The Price of Gold and the GDP of India..

There are a lot of factors which affect the price of gold.  Political turmoil, inflation, currency woes, economic growth, and investor speculation to name a few.  Mining increases the world's gold reserves by about 2500 tonnes or 1.8% of total reserves per year, so for the price of gold to just stay constant there needs to be a steady influx of new cash buying into the gold market, otherwise the additional supply of mined gold would lead to a glut and price reductions. 

An interesting bit of trivia about gold is that India buys more gold than any other nation, but not for bank reserves, rather, the purchased gold is used primarily for jewelry.  Wikipedia: Gold. 

India is the world's largest single consumer of gold, as Indians buy about 25% of the world's gold, purchasing approximately 800 tonnes of gold every year, mostly for jewelry. India is also the largest importer of gold; in 2008, India imported around 400 tonnes of gold. Indian households hold 18,000 tonnes of gold which represents 11 per cent of the global stock and worth more than $950 billion. 

So I thought it would be interesting to point out how the trend of the price of gold over the last 30 years would coincide with the trend of the GDP for India for the same time frame.  hmm.   Both trends are relatively flat for the first 20 years, and then around 2002, both trends climb in near unison, each more than tripling in value in less than a decade. 

30 Year Gold Price Trend: Source. http://www.goldprice.org/spot-gold.html

30 Year India GDP Trend: Source:World Bank Development Data

At $1,500 per ounce, it would require about $125 billion just to purchase the newly mined gold for a year.  Its not going to come from India.  The GDP of India has not increased enough to absorb the increased cost of their traditional share of the new gold production.  And once there is a glut in the market, the price doesn't just decrease, it falls off the table.

I wouldn't be at all surprised to see gold fall quite a bit from the current level.  The gold proponents like to talk about gold's inherent value as compared to currency because Governments can not just make more gold like they can make more currency. Gold's supply is limited and rare.  But don't overlook the fact that the supply does increase every year and if there aren't buyers willing to pay the current price for the newly mined gold, then the price will drop and continue to drop.

It is a market based on momentum and once the market picks up momentum one way or the other, it takes a significant event to change the direction.  India's meteoric rise in GDP over the last decade was the primary driver of the price of gold.  As that trend starts to flatten out, it will dry up the pool of buyers willing to continually buy newly mined gold and the price will fall.