What dictates Gold price in India: Top 5 factors

From the gold bars stashed by ancient empires to the gold coins of renaissance and colonial times – gold is an essential part of our life. The past 3,000 years have been no indication and hopefully will continue to be a part of life for at least another 3,000 years. Today, gold is most sought after, not just for investment purposes and to make jewellery, but it is also used in the manufacturing of certain electronic and medical devices.

Lately, the metal has started to lose its shine. The prices of gold have been tracing a downward spiral and as such customers have procured this metal in the hope of reaping substantial benefits when the price of the metal goes up again.

Inflation

Investors prefer to hold gold rather than currency. Usually, when inflation is high, the demand for gold increases and vice versa. The worth of gold will then shoot up because of high demand from customers. This holds for both international inflations as well as that which occurs in India. Due to its almost steady character as compared to currency, Gold holds significant value and is used to hedge inflation.

Gold Reserves: Government

The US Federal Reserve of the US and Reserve Bank of India holds gold are two prime examples of major gold reserves. It is when central banks of large countries start holding gold reserves and procuring more gold, the price of gold goes up. This is because the flow of cash in the market is increased while the supply of gold goes down.

Global Movement

India is one of the largest importers of gold and as such when the import prices change due to global movement in price, the same is subsequently reflected in the prices of gold at home. Gold is referred to as a crisis commodity - The value of the currency as well as various financial products may fall during any political upheaval, gold is seen as a safe haven by investors.

Jewellery Market

Indians hold a special attraction for their gold jewellery. In the wedding season and festivals like Diwali, gold prices go up as a result of increased consumer demand. The demand-supply mismatch leads to raised prices. The metal is also used in small quantities by various electronic companies for the manufacturing of devices such as television, computer, GPS, and other electronic gadgets. These combined reasons make the domestic demand for gold rise so much that India has to time and again import huge quantities of the yellow metal.

Interest rate trends

Current gold prices are largely good indicators of the interest rate trends of any country. With swelling rates of interest, customers tend to sell gold to acquire cash, and as such an increased supply of gold leads to reduced rates of the metal. Alternatively, lower interest rates translate to more cash in the hands of customers and as such greater demand for gold and thereby increased price of the metal.

The bottom line to keep in mind is that many factors affect the gold rate but ultimately it all boils down to the demand-supply game. The basic demand-supply mismatch is one of the primary reasons that drive the price of gold.