What
are the factors that influence gold prices in India?
It is extremely
unlikely to come across someone who is not aware of the inherent value of gold,
not only as a piece of jewellery or due to its auspiciousness, but as a strong
asset which can possibly yield solid returns, especially in times of economic
uncertainty. Owing to this fact, it becomes imperative for one to understand
what really drives the prices of gold in India. In this article, we will try to
understand the factors that influence the gold prices in India.
Let’s start with some
basic but essential facts and figures. India happens to be one of the largest
consumers of gold. The annual demand of gold in India is approximately
equivalent to 25% of the global physical demand. This makes it all the more
important to understand what determines the prices of gold here in India.
Relationship between
gold prices and inflation
Let’s start with the
relationship between gold prices and inflation, which is popularly phrased as
“gold acts as a hedge against inflation”.
Inflation, simply put,
is a decrease in the purchasing power of money which is reflected by a general
increase in the prices of goods and services in an economy, and when inflation
rates rise, the value of the currency decreases. Generally, inflation tends to
be directly proportional to changes in the price of gold, which essentially means
that higher levels of inflation will most likely result in high prices of gold
due to the value of currency declining. This can be explained by the fact that
people tend to hold wealth in the form of gold during inflationary periods,
under the assumption that the value of gold remains stable in the long run as
compared to that of currency, making it
the most ideal hedge against inflation.
Impact of interest
rates on gold prices
Generally, gold prices
tend to have an inverse relationship with interest rates. The reason behind
this can be possibly attributed to the fact that when interest rates fall,
people don’t get desirable returns on any deposits they hold, and they believe
that investing in gold would yield better returns, which leads to an increase
in the demand for gold, and consequently an increase in its price as well.
Conversely, when interest rates rise, people tend to sell their gold and
instead put their money in deposits with the hopes of earning higher interest,
which leads to a reduction in demand for gold, and consequently the price for
it declines as well. However, historically, no direct correlation exists
between gold prices and interest rates.
Impact of the Indian
jewellery market on gold prices
One cannot ignore the
impact of the Indian jewellery market on gold prices, owing to the cultural
beliefs of the Indian population, so let’s try to understand the relationship
between them.
All of us are aware of
how integral gold is to Indian households, and even more so during the festive
and wedding season. And, due to the increased consumer demand of gold in the
festive season, prices go up. One interesting fact to note here is that
according to a report by the World Gold Council (WGC) published back in 2019,
Indian households have accumulated around 25,000 tonnes of gold collectively,
which effectively makes India the largest holder of gold in the world.
Gold prices and
Monsoon
Let’s now come to a
rather interesting factor which impacts gold prices, which is a good monsoon
season.
If we were to consider
the numbers highlighted by reports, the rural segment of India accounts for
approximately 60% of India’s consumption of gold jewellery, and annually India
consumes about 700-800 metric tonnes of gold. These facts make rural gold
demand a crucial factor in determining the overall demand for gold in India and
consequently the prices of gold as well. The reason behind the correlation
between good monsoon rains and gold prices is that a good monsoon season
usually leads to good agricultural produce. This prompts farmers to spend a
portion of their earnings in buying gold for a multitude of reasons and also as
a safeguard if crops were to fail in subsequent harvesting seasons.
Impact of currency
fluctuations and import duties on gold prices
Other than these
factors, one should also consider the impact of currency fluctuations and
import duties can have on gold prices. Since gold is traded in USD in
international markets, any fluctuations in either USD or INR may impact gold
prices in India. As an example, if INR were to weaken against USD, then chances
are that the value of gold will increase in INR. India also imports a lot of
gold, given the fact that it is one of the largest consumers of gold and 89% of
the demand is fulfilled through import. Therefore, import duty also plays a
vital role in determining gold prices in India.
Impact of geopolitical
factors and uncertain outlooks on gold prices
As gold is considered
to be a relatively safe investment by investors, the demand and subsequently
the price of gold tends to increase during times of political instability,
geopolitical turmoil or general economic slowdown. Other asset classes tend to
witness a fall in their respective values during turbulent times which is
generally not the case with gold, making it a suitable commodity to park funds
during such times.
Impact of gold
reserves on gold prices
Let’s finally come to
the impact of government gold reserves on gold prices in India. The Reserve
Bank of India along with the central banks of multiple other countries hold
gold reserves along with currency. So, whenever such reserves start procuring
more gold, the prices of gold tend to increase due to the resultant increase in
the demand of gold.
Also Read: Gold’s recent correction offers
a good opportunity to enter as long-term outlook is bullish
Conclusion
In conclusion, we can
say that gold is a rather important commodity, especially when it comes to the
preferences and beliefs of the Indian subcontinent, and leadingly a multitude
of factors like the ones we discussed, and some others as well have a
considerable impact on gold prices in India.
