Gold is the most precious metal in India. With a yearly demand equivalent to about 25% of worldwide, it makes India one of the largest consumers of gold. From festivals to weddings to birthdays, no auspicious occasion goes by without making use of this metal. Other than being an auspicious metal, Indians also look up at gold as an investment that can help them during the financial crises. Traditionally, there is a surge in jewellery demand during the festive and wedding seasons, leading to a resurgence in gold prices. Throughout the time, gold has been living up to its standards. While the price of gold is moved by a combination of supply, demand, and investor behaviour, the demand for gold has a role to play in its price.
Also, one sure thing is that the price of gold is affected greatly by the international markets which have a huge impact on the prices here in India.
Let us look at some of the factors that determine the value of gold in India –
- Inflation –
Due to its almost durable characteristic as compared to currency, gold holds significant value and is used to hedge inflation. When there’s a hike in inflation, the value of the currency goes down and therefore people tend to hold money in the form of gold.
As a result ,the demand for gold increases and the price of gold shoots up because of the high demand from the consumers.
- Interest Rates –
Interest rates on financial products and services are tied closely to the demand for gold. Customers can benefit by regularly checking the gold prices as they are good indicators of the interest rate trends. With an increased rate of interest, people tend to sell gold and as such an increased supply of gold leads to a reduced rate of gold. On the other hand, a low rate of interest converts more cash in the hands of customers which leads to greater demand for gold in the market, and that is when the price of gold increases.
- Central Bank –
Central bank hold both currency as well as gold reserves. When the Central Bank of a country like ours ie: RBI, starts holding gold reserves and procuring more gold, the price of gold skyrockets. This is because the flow of cash in the market is increased while the supply of gold goes down.
In times when foreign exchange reserves are large, and the economy bustles, a Central bank of any country would want to reduce the amount of gold it holds. That is because gold generates no returns.
- Jewellery market-
India is known for its love for gold. Indians traditionally buy a lot of gold jewellery. It is a popular custom across India for centuries to buy gold for special occasions and festivals. As a result, the demand for gold increases around and during the time of festivals and wedding seasons, irrespective of the predominant price. This the time when India often ends up importing gold.
- Geo-Political factors –
Gold usually does well during geopolitical turmoil. Any kind of crisis, like wars, which harms other assets, has a positive impact on the price of gold because the demand for gold goes up during these times.