What factors cause gold rates to fluctuate?

Last Updated: Wed, Jan 18, 2017 12:19 hrs

Gold has always been considered as an important monetary asset across the world. In India, most of us are crazy about this yellow metal. We consider it as a symbol of status and wealth. India ranks high in consumption of gold across the globe. We Indians have lot of emotional quotient attached to gold which adds a special significance to this precious metal.

Gold jewelleries or ornaments are never out of fashion in our country. Since ages, gold has been used as status symbol in Indian weddings and during other special occasions. Gold offerings to Hindu deities are considered auspicious and add a religious sentiment.

In the Indian society, gold is always perceived as a safe haven that will help tide over any financial crisis. Apart from buying ornaments and coins, many investors today consider investing in Gold ETFs and mutual funds as a portfolio diversifier too.

Price of this special commodity keeps fluctuating on a daily basis depending on the market conditions, change in political and global business environment, behavioural trend of buyers and many more. Here are some of the factors that influence gold price fluctuations in India.

  • Demand and Supply: Gold price in the market depends on the demand and supply pattern of the metal. The price increases when there is a rise in demand for gold. It's vice versa when the supply is more in comparison of demand. Gold is one such scarce commodity which will continually be in demand. Equation of demand and supply plays major role when it comes to pricing gold in India.

  • International Gold Price: India being the largest consumer of the yellow metal, imports around 800-900 tonnes of gold annually. So, the price of gold in India will see an upward trend when the international price of gold rises. There are lots of factors in global markets that influence the international price of gold such as dollar dynamics, global demand for physical gold consumption, the global political and economical environment and much more. Performance of the US dollar also heavily influences the international gold prices. Dollar and gold are inversely related. Dollar being the internationally accepted currency heavily influences the price of gold which is traded internationally.

  • Inflation: Gold investments are used as a hedge against inflation. Though the value of currency keeps fluctuating, the value of gold is considerably stable in the long run as it's a metal with purity. Being the most liquid, it can be used to protect against any financial and economic crises. People find it safe to invest in gold when inflation shows an upward trend. This leads to the demand for gold increasing which ultimately result in gold prices rising.

  • Interest Rates: When the Reserve Bank of India hikes the rates of interest, people start selling gold to invest in government bonds and bank deposits. This leads to fall in gold demand. Dip in demand will lead to fall in price. Similarly, when RBI cuts down the rates of interest, people get encouraged to choose gold as a safe investment option and this will increase demand for it. Rise in demand will lead to a price hike. Hence, whenever interest rate falls, gold prices increase and vice versa.

  • Currency Fluctuation: Gold and other commodities are traded on international platforms in US dollars. That means, imported gold in India is valued in US dollars that will later be converted to Indian rupee for domestic trade. Hence, price of gold fluctuates with variation in rupee-dollar exchange rates. If the Indian rupee gains against the dollar, domestic gold prices will go down. If the rupee depreciates, it becomes costlier to import gold. During this year, gold rates have increased in India even though there is fall in the international gold price due to the rupee's depreciation against the US dollar. Hence, steady rupee-dollar equation and international prices are a greater factor in controlling the gold price fluctuation in India.

  • Import Duty: The precious metal is imported for consumption in India as we do not produce it. Thus, import duty is a crucial element that influences gold price fluctuations in Indian market. This year, the hike in import duties on gold to curb the imports by Indian government has made the yellow metal more expensive in India.

  • Government Reserves: Government holds reserves in the form of both paper currency and gold. When the RBI starts buying gold in greater quantity than it sells, it will also drive up the gold price domestically. There will be insufficient supply of gold which will lead to price rise. On the other hand, when the RBI starts selling gold in higher quantity than it buys, there will be a dip in the gold price due to demand-supply mismatch in the market.

  • Indian Jewelry market and Industry: Gold jewelry is an integral part of every Indian household. No Indian wedding and festival is complete without this auspicious metal. Major consumption of gold in India is for wedding and festivals like Dhanteras and Akshaya Thritiya. Wedding related gold purchases contribute over more than 50 % of the annual demand in the country. Hence, the price in India fluctuates based on these seasons. The demand for gold is more during wedding seasons which will result in the price rising. Small portion of gold is consumed by sectors like electronic manufacturing, health care industry and aerospace etc. This will also have an impact on demand and price of gold.

The Bottom Line

Gold being a precious metal holds a special significance and its price has been on a roller coaster ride for centuries. Though the process of determining the price of this yellow metal is informal in India, it keeps fluctuating depending on the global market conditions, country's economic and political conditions and also basis the consumer sentiment. The challenge is to meet the everlasting demand with the limited supply of this scarce commodity at a steady price.

Gold rate in india