Factors affecting gold prices in India

Indians buy gold mainly for the purpose of making jewelry and as an investment. A lot of Indians consider gold to be one of the safest investments, as it can be liquidated very easily in times of need.

Jul 18, 2017 05:07 IST India Infoline News Service

Gold is the most popular asset in India. It is an integral part of all celebrations and festivities in India. India is the largest importer of the yellow metal, and rightly so. India is the consumer of about 30% of the world’s gold. One can spot a lot of gold ornaments at a single wedding in India. Indians buy gold mainly for the purpose of making jewelry and as an investment. A lot of Indians consider gold to be one of the safest investments, as it can be liquidated easily in times of need.
 
Lately, the prices of gold have been in a downward spiral since the past couple of months. As of mid July, prices for 22 karat gold are at around 27,000 rupees per 10 grams. The reason for this particular downward spiral in the prices is very complicated. However, as a rough guide, here are a few general factors that impact the price of gold in India.
 
The jewelry markets:
 
The jewelry market plays an important role in affecting gold prices. In India, a vast amount of gold purchased is utilized in the form of gold ornaments and jewelry. The jewelry market in India is huge and is fueled by various Indian festivals and sentiments. A lot of Indians choose festival seasons for buying gold, keeping in view of an auspicious occasion. Hence, festival seasons see increased prices for the precious metal, due to very high demand. The demand-supply mismatch inflates the price of the metal for a short while.
 
Inflation
 
Gold is considered to be a very safe investment at all times. This becomes particularly true during times of inflation. Effectively, inflation reduces the purchasing power of money. When one is careful in spending money, one has to be even more careful while investing it. The correct investment during times of inflation would be in something that is stable, and has been so for a long time now. Gold is the answer to this problem. Gold makes for an excellent investment choice during inflation, as it is largely stable. It is among the world’s most respected mediums of exchange. The demand for gold increases during times of inflation, thus affecting its price.
 
Changes in global prices
 
Given that India imports a majority of its gold requirements, it is only natural that the price of gold in India will be affected by changes in global prices. Global prices for the metal may change due to a number of factors, such as change in global supply, change in demand, etc. Since India imports gold, its price is linked to the international gold prices. Changes in global prices of the precious metal are also reflected in domestic prices.
 
Central bank gold reserves
 
Central banks hold massive reserves of gold, in addition to currencies. When the central bank of a country starts to acquire and hold gold, its price generally shoots up. This rise in price is due to increased supply of money and decreased supply of gold.
 
Fluctuating rates of interest
 
Rates of interest on financial instruments and bank deposits also play a major role in determining the price of gold. Increased interest rates imply that people will sell their gold to put their money to better use. A lower rate of interest translates to more cash in the hands of the individual, and more capacity to buy gold.
 
The bottom line
 
Prices of gold go up and down all the time. As mentioned above there are a lot of factors at play that decide the price of the yellow metal. 

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