It is highly unlikely that you will meet an Indian who is unaware of the inherent value of gold. This high regard is given to gold due to its importance which extends beyond its use as jewellery or its auspiciousness amongst multiple cultures to include its potential for substantial returns, particularly during uncertain economic times. Due to this, it is crucial to recognize the true factors influencing gold prices in India. We shall make an effort to comprehend the variables affecting gold prices in India in this article.
Let’s begin with some fundamental yet important statistics and figures. One of the biggest users of gold globally is India. India’s annual demand for gold is roughly equal to 25% of the world’s total physical demand. Because of this, it is even more crucial to comprehend how gold prices are set in India.
Relation Between Inflation and Gold Prices
First let us take a look at how gold operates as a buffer against inflation, which is the main link between gold prices and inflation. Simply put, inflation is the loss of a currency’s purchasing power, which is reflected in an economy’s overall rise in the cost of goods and services. As the inflation rate rises, the value of the currency falls. In general, the inflation rate and fluctuations in the price of gold tend to be inversely correlated.
This simply implies that increased levels of inflation will most likely lead to higher prices of gold because the value of the currency will be dropping. This can be explained by the fact that during inflationary times, individuals seek to hold money in the form of gold on the belief that gold’s value will remain steady over time in comparison to that of currency, making it the best inflation hedge. For example, the gold rate in Mysore at the beginning of 2022 was around ₹49,800 while today gold rate in Mysore has gone up to ₹53,700 which is quite a hefty rise.
Demand and Supply Determining Gold Rates
Gold’s price is significantly influenced by supply and demand, as is the case with any traded good. Gold is not a consumable product which means that all of the gold that has ever been mined still exists. There is not a lot of gold mined each year. Due to the comparatively low supply, the price of gold rises as demand grows. Gold is used for more than simply making jewellery and that leads to increased demand.
Several electronic firms use the metal in small amounts to make products like televisions, computers, GPS units, etc. Gold is used in India for jewellery needs, as a gift item, as a status symbol, and as a reliable hedge against growing inflation. All of these factors work together to drive up domestic gold demand to the point that India frequently has to import significant amounts of this precious metal. 12% of the nation’s total demand for gold comes from the industrial sector. Therefore, demand-supply dynamics may be one of the causes if you’re wondering why the price of gold is increasing.
Global Trends In The Price of Gold
The cost of gold in India is impacted by any changes in its price on a global scale. This is mostly since India is one of the world’s largest importers, and as a result, when import prices vary due to fluctuation in the price of gold around the world, the same is consequently reflected in domestic gold prices.
As investors speculate that the value of money and other financial instruments may decline during political upheaval, gold is more in demand and costs more during periods of political turmoil than during periods of peace. When people’s faith in the government and the markets dwindles, they become more interested in purchasing gold.
Country’s Interest Rate Trend and Gold Prices
Gold demand and interest rates on financial goods and services are inversely related. In general, the price of gold at any given time is a reliable indicator of a nation’s interest rate developments. Customers often sell gold to obtain cash when interest rates rise, which increases the supply of the metal and decreases its price. In contrast to this, a decline in interest rates results in more money in people’s pockets, which in turn shoots up the demand for gold and, consequently, the price of the metal.
India’s Gold Reserve Affecting Prices
The Indian government has gold reserves which it may buy or sell through the Reserve Bank of India following its rules. Whether it buys or sells more can affect the price of gold. Therefore, you should also have a look at government purchases and sales if you are wondering why the price of gold is increasing in India at any given time.
Less than 1% of the world’s gold is produced in India. It is, nonetheless, the second-largest user of this precious metal and to meet the huge demand, it imports a lot of gold. As a result, import duty is crucial to the price of gold. For example, as previously mentioned today gold rate in Mysore is ₹53,700 but this might further go up significantly if the import duty levied on gold is suddenly increased.
Gold Prices During Monsoons
An extremely interesting phenomenon is the relation between gold prices and monsoons in India. As you may know, the demand for gold in rural areas of the country is a crucial element that influences gold prices. 60% of India’s yearly use of gold, approximately 800-850 tonnes, comes from rural areas. The monsoon has a major impact on rural gold demand. Farmers typically buy extra gold to expand their assets if the crop is successful. On the other side, a poor monsoon season results in less gold being purchased.
Gold prices in India depend on myriad reasons some of which are explained above. But apart from these causes, there are other determinants of gold rates such as the weakening of the Dollar, currency fluctuations (difference between INR and Dollar), geopolitical reasons, and others. But more than anything the price of gold in India is most affected by the differences between Demand and Supply.