Oh, how much we Indians love gold. It’s not just a yellow metal for us, it is rooted deep in our culture and tradition.
Did you know that the Indian households have 11% of the world’s gold?
It’s way more than the gold reserves of IMF, USA, Switzerland and Germany put together!
Can you believe that? It’s crazy!
From last year the gold price has increased drastically. Investing in gold is one of the oldest kinds of investment.
It is one of the most preferred forms of investment in India as it is considered safe and has a stable value.
Today's gold price plays a major role in while investing in gold as you might want to buy it when its value is less and sell when the value rises.
But what are the factors that affect the price of gold?
Keep reading to find out!
Factors Affecting Gold Price
Today gold price in India is affected by the following factors:
There’s always a demand for gold in India.
This yellow metal is not only considered good for financial protection but has cultural or traditional value to it.
Therefore, the demand for gold in an Indian household is always high.
When there is a high demand, the price of gold increases and when the demand is less, the price of gold falls. Thus, demand and supply play a major role in gold pricing.
Price of gold, generally, reacts to inflation. But why is that?
It is so because as inflation rises, the value of our currency goes down. Due to this, people tend to hold money in the form of gold.
Gold acts as a hedge against the inflationary conditions when high inflation persists for a longer duration of time.
As gold’s value is much more stable than currency, the demand for gold rises. And as the demand is high, the price of gold also rises.
Thus, at the time of inflation, the price of gold is high.
Although the global price of gold doesn’t get affected by it the equation between rupee and dollar plays an important role in Indian rates of gold.
If the Indian currency weakens, the value of the dollar will increase. As gold is mostly imported, its prices will most probably go up in Indian currency.
In other words, if the value of Indian rupee depreciates, importing gold will turn pretty costly.
As we said earlier, it does not affect the value of gold in terms of the dollar.
The gold reserves held by Central Banks (In India, Reserve Bank of India), have a big impact on gold prices.
The price of gold can be affected just by the decision of the central bank to buy or sell gold. If the central bank is acquiring more gold, the prices of gold will go up.
This massive amount of gold reserve is held by the central banks to be sold at the time when the economy is thriving.
When the central bank starts to lessen their gold reserve, there is more gold available in the market to be sold. This over-supply of gold reduces its value as the demand is the same.
This way, the price of gold decreases.
Under normal conditions, the relationship between gold and interest rate is negative.
In the hope of high returns, people sell their gold when the interest is rate rises. Due to a large supply of gold in the market, the value of gold goes down and the price decreases.
When the rate of interest is low, people start buying gold which creates a high demand and it leads to an increase in the price of gold.
But this only happens in short-term surveillance. In long-term, interest rate and gold have a positive relationship, as observed in the past.
Indians consume a lot of gold solely for the purpose of adornment. Gold is a crucial part of India.
During many festivals such as Dhanteras, buying gold is considered auspicious.
Thus, this increases the demand for gold during festivals and higher demand leads to higher price of gold.
In fact, half of the consumption of gold is done in the form of jewellery.
When it comes to global demand, India, China and the United States are the largest consumers of gold when it comes to jewellery.
In India, a large fraction of gold is consumed by the rural parts of India as the urban part is more interested in real estate or the stock market.
Thus, rural demand plays an important role.
When there is good monsoon, the harvest is good as well. And if the harvest is good, it leads to good earning.
People tend to invest their money in gold as the value of gold is much stable than currency.
So, in future, if the harvest is bad, the gold will help them fulfil their basic needs.
As mentioned earlier, the value of gold is very stable when compared to currency.
This is why people tend to invest more in gold to protect themselves from volatility.
They can sell it off in the time of distress. Indian households view gold as a safe haven.
Investing in gold is considered safe in India. There’s also demand for gold in ETFs i.e. exchange-traded funds.
ETF or exchange-traded fund is an investment fund that is traded on stock exchanges.
According to the World Gold Council, there’s five per cent growth in value terms i.e. ETF backed by gold added 170 tonnes in April 2020.
Today gold price is affected by so many factors. These are just a few of those reasons.
Investing in gold is always a good option as it provides safety during the time of recession. It is always necessary to have a stable investment as it helps in securing your future.
We hope that we helped you in explaining how today gold price in India is affected.
Feel free to comment and let us know if you found this blog informative or if you have any queries.
